Some times clients will ask me if they should classify their workers as employees vs. contract labor, eligible for Form 1099 at year end, instead of Form W-2 Wage and Withholding Statement. The advice I give them is to read the IRS guidelines regarding contract labor. The IRS has very strict guidelines regarding contract labor and can be unforgiving if they believe someone deliberately set out to deceive them in regards to payroll taxes. There are no shades of gray when it comes to employee taxes. Ignorance of the law is not a defense against tax evasion. There are far too many professionals, as well as, the IRS website, available to help employers with questions regarding contract labor or not.
Here’s a link to the IRS website that will help you define if your workers are contract labor or employees. http://www.irsvideos.gov/ProperWorkerClassification
As an employer you must withhold FIT, FUTA, and FICA taxes from employee earnings, and any state and local withholding’s. The employer must match the FICA withholding’s that the employee pays each pay period. Deposit requirements for employer and employee withholding’s vary according to the amount of taxes reported during a “lookback period”. Depending on the total amount of taxes involved (federal income tax and FICA tax withheld from employees’ earnings plus the employer’s portion of the FICA tax), employers may have to pay their taxes several times a month or monthly. Some employers may not have to make any deposits but, instead, may pay their taxes at the time of filing their quarterly return, Form 941.
Every employee must fill out Form W-4 when hired by a company, if they refuse to fill out the form or do not turn it in by the end of the first pay period, the employer withholds taxes as if the employee is single, with no withholding allowances. Since the employers are required to get each employee’s social security number on Form W-4, they can request to see the employee’s social security card, and they can photocopy the card for their files.
This is just a very short blog about contract labor vs. employee status. Remember to always play it safe, if the worker is not a company with an EIN, they work under you or a manager’s supervision, and are on a scheduled payroll, they are an employee. If they have an EIN, own their own company, and are are not supervised by you or a manager, it’s pretty safe to say they’re a sub contractor.
If you have any questions feel free to contact me by email at: firstname.lastname@example.org, or call at (775) 225-0893.
Nadine Mickey CPB CPS, President Quality Bookkeeping, LLC