
IRS Plans a 50% Ramp-Up in Audits of Small Businesses Next Year
Charles Read, CPA, USTCP, IRSAC
President/CEO...
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GetPayroll is the last word in fully compliant, online payroll and payroll tax services for businesses of all sizes. Our focus is YOUR business. We work with you in the trenches to make running your business easier, every step of the way.
Our President, and CEO, Charles Read, is an MBA, CPA*, U.S. Tax Court Practitioner (USTCP), Internal Revenue Service Advisory Council (IRSAC) member, Employment Tax Expert, IRS Watchdog, and Small Business Advocate. He is a repeat business author.
The CEO’s door is always open. Mr. Read prides himself on his exceptional service. His dedication to his customers is extraordinary. So much so that you can pick up the phone and call him directly! What other payroll service company does that?!
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If anything happens as a result of our processing, we will take care of anything that has to do with employment tax regulating authorities including the IRS 100% guaranteed.
With a U.S. Tax Court Practitioner on staff, we have the unique ability to not only run your payroll correctly and securely, but can also advocate for you in all levels of the IRS up to, and including U.S. Tax Court.
GetPayroll has an INTERNAL REVENUE SERVICE ADVISORY COUNCIL MEMBER (IRSAC) on staff. There are only seven appointed every three years.
GetPayroll has a USTCP/U.S. TAX COURT PRACTITIONER on staff which allows special dispensation to non-lawyers to represent clients in tax court.
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Our ever-growing list of frequently asked payroll questions will keep growing as we hear from you. We’ve categorized our FAQs into intuitive topics so you can easily and quickly find the answers you need.
Can’t find your answer? We want to help so give us a call at 972-353-0000 or Live Chat with us.
Absolutely, you can pay employees multiple rates. There are a couple of ways that you can do paying an employee multiple rates. If this is a one-time extra adjustment, you can simply add that information to the pay grid.
If this is a recurring additional rate then it needs to be added at an extra rate to the employee(s) profile.
Go to the employer login page.
If you have any questions about employees multiple rates of pay, please contact us at 972-353-0000.
Setting up a child support deduction or garnishment is a 2-part process.
Part 1:
Part 2:
If you have any questions on how to set up a child support deduction or garnishment, please give us a call at 972-353-0000.
Through the employee portal can the employee get copies of check stubs and W-2s. Employees for GetPayroll clients can gain access to their check stubs and/or W2s by going to www.getpayroll.com and clicking on the EMPLOYEE PORTAL button in the upper right-hand corner of the website. Your employee will click on the NEW USER REGISTRATION to create his/her own username and password. S/he will also be prompted for other information so to verify his/her identity.
NOTE: GetPayroll will not release any personal information to an individual employee. We will only communicate with the authorized payroll contact.
Follow these steps to add a second check for an employee.
Setting up payroll reminders is easy.
If you have any questions, please give us a call at 972-353-0000. We’ll be glad to help.
To add direct deposit for GetPayroll clients is a 2-part process.
Part 1: Click the EMPLOYEES tile on the left-hand side of the screen.
Part 2: Click on SCHEDULED E/Ds on the left-hand menu bar.
Forget your password? No problem! For GetPayroll clients, click here to go to the login page and click the “I forgot my password” link.
You can access the GetPayroll services payroll dashboard from any device: your computer, smartphone, or tablet. If you choose to view your payroll dashboard on your smartphone, you should choose “Use Full Website” to have access to all features. For optimal viewing, we suggest your computer or large screen tablet.
A great question – What is the difference between an independent contractor and an employee? In the last few decades, the numbers of independent contractors have mushroomed. The reason in many cases is to force workers to pay for an “opportunity to work” rather than paying wages and overtime, like a worker who purchases a “contract” to clean a building, or a taxi driver who rents a cab for a twelve-hour shift. There is very little difference in the work done between these independent contractors and full-time employees doing the same job. But the independent contractor (IC) label keeps workers from getting the protection of the labor laws at the Federal and State level as well as denying them the right to organize into a labor union.
Advantages of hiring IC over employees.
Disadvantages of hiring IC over employees.
Disadvantages to hiring employees.
As there are downsides to employees, there are downsides to independent contractors besides scheduling, as mentioned above. Independent contractors are not, as we will discuss later, subject to your control. Their charges are subject to market variation and demand. You may pay them $25.00 an hour this month and with changes in the market and demands on their time next month you may find their rate to be double.
If you have misclassified a new hire as independent contractors and the IRS says they are really employees the taxes, penalties, and interest due can be devastating. Remember that the IRS and the Department of Labor would prefer there be no independent contractors.
How does the IRS decide who is an employee and who is an IC?
In 1987, the IRS created a list of 20 factors they consider relevant after examining the case law.
The amount of weight given to each of the twenty factors depends on the job and the actual situation that the worker operates in. The twenty items listed in the IRS Revenue Ruling 87- 41 include the following:
The IRS has identified three types of conditions could be used in determining the status of a worker as an independent contractor or an employee:
(1) Behavioral control;
(2) Financial control; and
(3) Relationship of the parties.
The IRS makes the point that in addition to the twenty common law tests there other factors that may be relevant to the status and that the weight allocated to each factor may vary based on the situation.
In general, the following is true. Individuals who offer the services they perform in the course of their profession to the general public are normally independent contractors.
Courts realize that highly skilled or highly educated workers don’t require the minute by minute supervision so day to day control over a worker in not necessarily helpful in determining status. The courts are tending to focus on the worker’s ability to realize the profit or loss from their services particularly as shown by who pays expenses and who finances the business.
I just wrote a blog post about this question – Will changing employees into independent contractors save on payroll taxes? And also debunking some ideas about payroll. This was one of the topics I discuss. Read the entire blog post, but here’s my answer to that question.
You are also forgoing the upside of hiring employees.
In the end, if there is a dispute, the court will decide.
Learn more about W2s versus 1099s here.
Minimum wage is the lowest amount per hour you must pay an employee in the United States based on Federal Employment Law. Currently, the approved Federal amount is $7.25 per hour. Some states like New York, Vermont, Massachusetts, and California, for example, have a higher minimum wage. U.S. Department of Labor states, “Where an employee is subject to both the state and federal minimum wage laws, the employee is entitled to the higher rate.”
For instance, head on over to our blog post about the minimum wage to find out your minimum wage rate for your state and municipality.
All new hires are required to complete Form W-4 and I-9. Copies should be kept in your files, and you must have them for at least three years on all employees if audited.
New hire reporting has to go to the state on every newly hired employee. It is required. Failure to do so could be very expensive.
HR (human resources) is not technically a part of payroll. Payroll is the calculation of an employee’s pay. Issuing payment for work performed. Filing government reports and paying taxes.
HR is the company department charged with finding, screening, recruiting and training job applicants, and administering employee-benefit programs. A portion of the HR function impacts an employee’s payroll, but much does not.
HR and payroll may fall under the same department in some companies and different departments in other companies. Sometimes payroll is viewed as an accounting function under the controller while HR is under a VP of HR
Every involuntary garnishment will come with a court order. That order should have full and complete instructions on:
You have to know the rules on maximum garnishments and whether the employee has multiple garnishments and how to prioritize them. Please contact us with questions at info@getpayroll.com.
All cash and non-cash employee tip income are subject to Federal income taxes. All cash tips received by an employee in any calendar month are subject to social security and Medicare taxes. They must be reported to the employer unless the tips received by the employee during a single calendar month while working for the employer total less than $20. Cash tips include tips received from customers, charged tips (e.g., credit and debit card charges) distributed to the employee by his or her employer, and tips received from other employees under any tip-sharing arrangement.
Employees who receive tips must do three things:
After the month the tips are received, employees must report tips to the employer by the 10th of that month. For example, tips received by an employee in August 2014 are required to be reported by the employee to the employer on or before September 10, 2014. If the 10th falls on a Saturday, Sunday, or legal holiday, an employee may give the report to the employer by the next day that is not a Saturday, Sunday, or legal holiday. An employer may require employees to report tips more than once a month. However, the statement cannot cover a period of more than 1 calendar month.
An employer’s or employee’s characterization of a payment as a “tip” is not the last word. Distributed service charges (often referred to as “auto-gratuities” by service industries) should be recorded as non-tip wages. Revenue Ruling 2012-18 lists the factors to determine whether such payments are tips or service charges.
The employer has several responsibilities regarding tips including recordkeeping, reporting, collecting taxes on tips, filling and filing forms as well as depositing taxes.
Employers must -retain employee created tip reports, withhold federal income tax and the employee share of FICA and Medicare taxes based on wages paid and tips reported to the employer. The employer reports this information and deposits taxes along with all other employment tax obligations the employer has. Employers must calculate and pay the employer portion of FICA and Medicare taxes as well. This is calculated on the total wages paid and the tips reported to the employer by tipped employees.
Tip income reported to the employer by the employee are to be included in Box 1 (Wages, tips, other compensation), Box 5 (Medicare wages and tips), and Box 7 (Social security tips) of the employee’s Form W-2. Enter the amount of any uncollected social security tax and Medicare tax in Box 12 of Form W-2. For more information, see the General Instructions for Forms W-2 and W-3.
Employers report FIT, FICA and Medicare taxes withheld from employees’ wages and the employer calculated portion of FICA and Medicare taxes on Form 941, Employer’s Quarterly Federal Tax Return. The taxes are deposited according to current federal tax deposit requirement for the employer.
Employers are also required to file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, and depositing the calculated taxes as well. The employee pays no FUTA tax, it is levied only on the employer. More in a later chapter on FIT, FICA, Medicare and FUTA taxes.
Report tips: When employees do not report some of their tips to their employer, the employer is not liable for the employer share of social security and Medicare taxes on the unreported tips. That is until the IRS sends a notice to the employer with demand for the taxes. The employer is not liable to withhold and pay the employee share of social security and Medicare taxes on the unreported tips.
For more information on the Section 3121(q) Notice and Demand, see Revenue Ruling 2012-18, which sets forth guidance on social security and Medicare taxes on tips.
A payroll deduction is a reduction in the employee’s net pay. It typically includes income tax, national insurance or social security contributions. It may also include group insurance or pension fund contributions, union or association dues, authorized wage assignments, garnishments, etc. Please email our payroll processing specialists with any additional questions at info@getpayroll.com.
According to state abandoned property laws, unclaimed paychecks (wages) become a form of “abandoned property.” The employer (you) must pay the unclaimed wages over to the appropriate state treasury agency if they remain unclaimed for a certain number of months or years.
Escheat laws are state abandon property laws that govern abandoned property. The property “escheats” or reverts property to the state.
When you have an unclaimed check, there are certain steps you need to take. For instance, head on over to our blog post for details on what you need to do next.
Employees unclaimed wages become abandoned after a period of time. Each state has its own laws on this.
You can search Google with the phrase “Escheat Laws + [your state]”, or head over to our blog post for a list of when unclaimed wages become abandoned by state.
Unclaimed checks from past employees fall under state abandoned property law. The state abandoned property laws governing abandoned property are known as escheat laws because the property “escheats” or reverts property to the state.
Here’s what you need to do.
Step 1: Document every contact you made to the ex-employee.
Most states require employers to contact employees in an attempt to keep unclaimed wages from becoming abandoned property.
Step 2: File an annual report with your state.
States generally require the employer to file an annual report. The report includes each employee’s full name, last known address, amount and payment date of the unclaimed checks, and the date of the last contact with the employee.
Step 3: Send the unclaimed wages with the report.
With that report, the wages need to be sent to the State Treasury. The State Treasury will “hold on” to the money indefinitely for the individual. As an employer, your responsibility for paying those wages is over when you have submitted those funds and complete information to the state.
Some states put a minimum amount such as $50.00 and below in which the unclaimed wages DO NOT have to be reported or sent to the state. Check with your state on whether this rule applies to you. If, in fact, you don’t have to send it to the state it needs to be reported as income to the employer. It is also subject to federal income tax.
Head on over to our blog post to learn more and also see when unclaimed wages become abandoned in your state.
Report tips: When employees do not report some of their tips to their employer, the employer is not liable for the employer share of social security and Medicare taxes on the unreported tips. That is until the IRS sends a notice to the employer with demand for the taxes. The employer is not liable to withhold and pay the employee share of social security and Medicare taxes on the unreported tips.
For more information on the Section 3121(q) Notice and Demand, see Revenue Ruling 2012-18, which sets forth guidance on social security and Medicare taxes on tips.
If your employee loses his W-2, provide a copy from your files. It can be a different copy than the Copy B he normally gets for filing with his Form 1040. They all have the same information. With GetPayroll, employees receive access to a lifetime portal to access their W-2s as well as all pay stubs. Schedule a quick demo to learn more about our payroll services.
According to state abandoned property laws, unclaimed paychecks (wages) become a form of “abandoned property.” The employer (you) must pay the unclaimed wages over to the appropriate state treasury agency if they remain unclaimed for a certain number of months or years.
Escheat laws are state abandon property laws that govern abandoned property. The property “escheats” or reverts property to the state.
When you have an unclaimed check, there are certain steps you need to take. For instance, head on over to our blog post for details on what you need to do next.
Employees unclaimed wages become abandoned after a period of time. Each state has its own laws on this.
You can search Google with the phrase “Escheat Laws + [your state]”, or head over to our blog post for a list of when unclaimed wages become abandoned by state.
Unclaimed checks from past employees fall under state abandoned property law. The state abandoned property laws governing abandoned property are known as escheat laws because the property “escheats” or reverts property to the state.
Here’s what you need to do.
Step 1: Document every contact you made to the ex-employee.
Most states require employers to contact employees in an attempt to keep unclaimed wages from becoming abandoned property.
Step 2: File an annual report with your state.
States generally require the employer to file an annual report. The report includes each employee’s full name, last known address, amount and payment date of the unclaimed checks, and the date of the last contact with the employee.
Step 3: Send the unclaimed wages with the report.
With that report, the wages need to be sent to the State Treasury. The State Treasury will “hold on” to the money indefinitely for the individual. As an employer, your responsibility for paying those wages is over when you have submitted those funds and complete information to the state.
Some states put a minimum amount such as $50.00 and below in which the unclaimed wages DO NOT have to be reported or sent to the state. Check with your state on whether this rule applies to you. If, in fact, you don’t have to send it to the state it needs to be reported as income to the employer. It is also subject to federal income tax.
Head on over to our blog post to learn more and also see when unclaimed wages become abandoned in your state.
Employee income tip reporting: In the beauty industry, everyone typically receives tips. All cash and non-cash employee tip income are subject to Federal income taxes. All cash tips received by an employee in any calendar month are subject to social security and Medicare taxes. They must be reported to the employer unless the tips received by the employee during a single calendar month while working for the employer total less than $20. Cash tips include tips received from customers, charged tips (e.g., credit and debit card charges) distributed to the employee by his or her employer, and tips received from other employees under any tip-sharing arrangement.
Employees who receive tips must do three things:
After the month the tips are received, employees must report tips to the employer by the 10th of that month. For example, tips received by an employee in August 2014 are required to be reported by the employee to the employer on or before September 10, 2014. If the 10th falls on a Saturday, Sunday, or legal holiday, an employee may give the report to the employer by the next day that is not a Saturday, Sunday, or legal holiday. An employer may require employees to report tips more than once a month. However, the statement cannot cover a period of more than 1 calendar month.
An employer’s or employee’s characterization of a payment as a “tip” is not the last word. Distributed service charges (often referred to as “auto-gratuities” by service industries) should be recorded as non-tip wages. Revenue Ruling 2012-18 lists the factors to determine whether such payments are tips or service charges.
For employee income tip reporting, the employer has several responsibilities regarding tips including recordkeeping, reporting, collecting taxes on tips, filling and filing forms as well as depositing taxes.
Employers must -retain employee created tip reports, withhold federal income tax and the employee share of FICA and Medicare taxes based on wages paid and tips reported to the employer. The employer reports this information and deposits taxes along with all other employment tax obligations the employer has. Employers must calculate and pay the employer portion of FICA and Medicare taxes as well. This is calculated on the total wages paid and the tips reported to the employer by tipped employees.
Tip income reported to the employer by the employee are to be included in Box 1 (Wages, tips, other compensation), Box 5 (Medicare wages and tips), and Box 7 (Social security tips) of the employee’s Form W-2. Enter the amount of any uncollected social security tax and Medicare tax in Box 12 of Form W-2. For more information, see the General Instructions for Forms W-2 and W-3.
Employers report FIT, FICA and Medicare taxes withheld from employees’ wages and the employer calculated portion of FICA and Medicare taxes on Form 941, Employer’s Quarterly Federal Tax Return. The taxes are deposited according to current federal tax deposit requirement for the employer.
Employers are also required to file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, and depositing the calculated taxes as well. The employee pays no FUTA tax, it is levied only on the employer. More in a later chapter on FIT, FICA, Medicare and FUTA taxes.
You are not actually being taxed twice on the same income. You refer to corporate tax; if your business is a corporation, then the corporation is taxed on its earnings. But, the salary that is paid to you (and which is what you are taxed on) is a deduction. Salary is only taxed once.
If your business is an S-corporation, the corporation itself doesn’t pay tax; everything is passed through to your individual return. So, again, no double tax. If you didn’t mean to refer to “corporate tax”, and your business is a sole proprietorship or a single-member LLC, again everything just appears on your individual return — the business is not a separate taxpayer. (If the business were a partnership or multiple-member LLC, you probably would not have said: “I own a small business”, so I’m ignoring those. But there would be no double taxation, either. Assuming also that you would not elect to have an LLC taxed as a corporation — which you could do. If you did, the same treatment described above would apply.
There is one situation when there is double taxation. A corporate dividend is taxable to you but is not deductible by the corporation. So if you have a corporation (not a sub-S) and you receive a distribution as a dividend, the tax would be paid twice (but it is once by the corporation and once by you). That may not seem fair, but (i) you probably won’t be receiving dividends, and (ii) that’s the way dividends work for individuals in the US.
There are many forms that a small business owner should file for tax season.
Schedule C, for example, is used for the typical single owner business (sole proprietorship).
If you have an LLC set up in your state, your filing status may be determined by state laws. For instance, in CA, single-member LLC’s can’t use Schedule C for a sole proprietorship. They must file as a C or S corporation.
If your state doesn’t dictate how you can file, LLC’s can choose their tax status. For single owners, you can choose a Schedule C sole proprietorship on your personal return, or you can be taxed as a C or S corporation. If there are two or more owners, you can choose between a Partnership or a C or S corporation.
Partnerships file on a Form 1065. C corporations file on a Form 1120. S corporations file on a Form 1120S.
Business returns are generally due by March 15th each year, unless you have a fiscal year end other than the calendar year. K-1’s are required to be issued to the owners from the business in a partnership or S corporation to report the income earned from the business. The K-1 is then reported on the owner’s personal return to pay taxes on the business income. C Corporations pay taxes directly on their returns, so no K-1 is necessary.
If you’re unsure about what to file, or what will be best for you and your business to choose as a business and tax entity, you should consult with a tax professional.
You have two unemployment tax rates – Federal and State.
Your Federal Unemployment Tax Rate is fixed. That is to say, It changes infrequently. Learn more here.
Your State Unemployment Tax Rate is sent to you each year by every State in which you have a reported employee. For example, if you have employees in Delaware and Pennsylvania, you’ll receive two unemployment tax rates. If you use a payroll provider (like GetPayroll!) be sure to send them your new rate each year. As a result, you will avoid penalty and fees for underpayment. If you are a GetPayroll client, we will email reminders to send us your new rate. Each State also has default employment tax rates for new employers and should let you know what that is when you register and get your State Unemployment Tax ID.
Learn more about our payroll services by scheduling a demo.
I just wrote a blog post that included this question – Are all tax-free benefits exempt from payroll taxes? Plus, I debunk some ideas about payroll. Tax-free benefits is one of the myths. Read the entire blog post, but here’s my answer to that myth.
I just wrote a blog post about this question – Can I pay employment taxes with my quarterly employer tax return? Plus, debunking some ideas about payroll. This is one of the myths. Read the entire blog post, but here’s my answer to this question.
I just wrote a blog post about incorporating and if it will relieve a business owner of unpaid employment taxes. It included debunking some ideas about payroll. This was one of the myths. Read the entire blog post, but here’s my answer to this question.
The trust fund recovery penalty is only for the taxes that were withheld from the employee’s payroll. That portion of the employment taxes that the corporation is required to pay is dischargeable in bankruptcy of the corporation or LLC. You will not be held personally liable, period. Further, the trust fund recovery penalty is only for responsible parties as defined by the IRS and the courts.
I just wrote a blog post that included this question – Are all tax-free benefits exempt from payroll taxes? Plus, I debunk some ideas about payroll. Tax-free benefits is one of the myths. Read the entire blog post, but here’s my answer to that myth.
I just wrote a blog post about tax-free benefits and some other ideas about payroll. This was one of the myths. Read the entire blog post, but here’s my answer to that question.
Qualified benefits offered under a cafeteria or Section 125 plans are exempt from FICA. This includes contributions made toward a medical, dental, vision and accident insurance plan and a flexible spending account, such as dependent care assistance and medical care reimbursements. Payments toward health savings accounts and group-term life insurance of $50,000 or less, plus qualified transportation expenses and disability insurance, are exempt from FICA.
There are a number of exemptions from overtime rules. These include being a 20% owner or better and working in the business. Other exemptions which you can get details from us or the US Department of Labor include:
The easiest way to track employee time and attendance is by using a time clock. A biometric time clock is always the best option. For instance, it will eliminate buddy punches. Companies using time sheets may be overpaying by an average of 10%. With the addition of a time clock, for example, you will save time and money. Learn more about time clock services here.
Supervision is key to get employees to fill out their timesheet correctly. If the employee can’t or won’t fill out a timesheet correctly the supervisor will have to have the employee come to you each time so you can check and approve it.
A time clock is a way around this. The employee punches in and out or they don’t get paid. If they don’t punch the time clock their supervisor is responsible for knowing the time they worked. If there is an employee who is abusing the system for their gain the only solution may be to terminate them for the documented cause.
GetPayroll now offers time clock services. Learn more about our time clock services here.
There are several reasons why you should use a time clock instead of a time sheet. Improper time keeping accounts for 8% of all overpayment errors in payroll.
There are six common problems with traditional timesheets.
Using a time clock will benefit you, as the business owner:
Legal disputes over employee wages and hours are growing.
Paper timesheets can get lost or destroyed which means the employer is losing attendance records required by law. If an employee has contemporaneously created time records, and challenge the employer for overtime, they will win.
Easier time approval.
With an electronic system, timesheet approval is much simpler. No need to track down employees to rectify messy time sheets and you can access time record archives at any time.
Avoid overpayments.
Electronic timekeeping systems mean less error for both the employee and employer. Accurate time reporting and payment means less headache for businesses.
Download our infographic guide on time clocks and overpayments.
Learn about Access 1 Source, the vendor we recommend for physical and web-based time and attendance services.
Buddy punching occurs when an employee asks another employee to “clock-in” for them. It is done through a time stamp clock or even handwriting on a time sheet. It most often occurs when an employee is running late and asks another employee to mark him on-time on the timesheet.
Most employees don’t realize that it’s a form of payroll fraud. It costs U.S. employers more than 373 million dollars annually (2017).
Be sure to add it to your employee manual so employees realize it is considered payroll fraud. Document what will happen if an employee is caught. For example, “An employee shall be subject to disciplinary action up to and including discharge.”
To avoid buddy punching, consider switching to a biometric time clock or individual key cards employees have to swipe to clock-in.
Learn about the time clock options GetPayroll offers.
Interested in creating an employee handbook/policy manual for your company (the answer should be yes!), enroll in our HR services for your Federal and State handbooks. Or, contact us to learn more at 972-353-0000, chat online, or schedule a call.
An on-payroll job is one where the worker is an employee of the company for which they work. Taxes are withheld and paid into the government.
Off-payroll jobs mean you are not an employee. In all likelihood, the worker is an independent contractor. The worker is responsible for all of his taxes. No company benefits and no mandated benefits or protections that are available to employees or on-payroll job workers. However, there are some tax advantages available for workers in off-payroll jobs such as deducting commuting expenses and all business related expenses. Those deductions are not available to an employee.
To classify employees correctly can be a challenge. Employees are classified as either
Classification can be difficult. There are also independent contractors and booth renters, which are not legally “employees.” If there is a disagreement between you and the IRS in how you classified a new hire, a court will decide how your employee will get classified.
Get our infographic to help you easily know the difference between an independent contractor and an employee.
A great question – What is the difference between an independent contractor and an employee? In the last few decades, the numbers of independent contractors have mushroomed. The reason in many cases is to force workers to pay for an “opportunity to work” rather than paying wages and overtime, like a worker who purchases a “contract” to clean a building, or a taxi driver who rents a cab for a twelve-hour shift. There is very little difference in the work done between these independent contractors and full-time employees doing the same job. But the independent contractor (IC) label keeps workers from getting the protection of the labor laws at the Federal and State level as well as denying them the right to organize into a labor union.
Advantages of hiring IC over employees.
Disadvantages of hiring IC over employees.
Disadvantages to hiring employees.
As there are downsides to employees, there are downsides to independent contractors besides scheduling, as mentioned above. Independent contractors are not, as we will discuss later, subject to your control. Their charges are subject to market variation and demand. You may pay them $25.00 an hour this month and with changes in the market and demands on their time next month you may find their rate to be double.
If you have misclassified a new hire as independent contractors and the IRS says they are really employees the taxes, penalties, and interest due can be devastating. Remember that the IRS and the Department of Labor would prefer there be no independent contractors.
How does the IRS decide who is an employee and who is an IC?
In 1987, the IRS created a list of 20 factors they consider relevant after examining the case law.
The amount of weight given to each of the twenty factors depends on the job and the actual situation that the worker operates in. The twenty items listed in the IRS Revenue Ruling 87- 41 include the following:
The IRS has identified three types of conditions could be used in determining the status of a worker as an independent contractor or an employee:
(1) Behavioral control;
(2) Financial control; and
(3) Relationship of the parties.
The IRS makes the point that in addition to the twenty common law tests there other factors that may be relevant to the status and that the weight allocated to each factor may vary based on the situation.
In general, the following is true. Individuals who offer the services they perform in the course of their profession to the general public are normally independent contractors.
Courts realize that highly skilled or highly educated workers don’t require the minute by minute supervision so day to day control over a worker in not necessarily helpful in determining status. The courts are tending to focus on the worker’s ability to realize the profit or loss from their services particularly as shown by who pays expenses and who finances the business.
If an employee is classified as nonexempt from overtime but actually should receive overtime, any overtime they have worked you must pay them and the associated taxes. The courts will enforce this.
It’s important to always keep clear records of hours worked by all employees. If you were paying overtime and they were really exempt you have a different problem. You paid them overtime wages they were not due. Trying to get that back is going to be difficult internally with a very upset worker and may be impossible to enforce if the employee objects.
What is a Form W-2? That’s a more common question than you may think. The Form W-2 is the summation of all of an employees payroll data for the year. It is sent with all other W-2s and a summary form called a W-3 to the Social Security Administration by January 31st of the following year. It must also be supplied to the employee by the same date.
If you discover an error on a W-2 after the employee has filed their own Form 1040 they may be required to file an amended Federal Tax return. They may also have to file an amended State Tax Return. Errors have to be corrected.
I just wrote a blog post about this question – Will changing employees into independent contractors save on payroll taxes? And also debunking some ideas about payroll. This was one of the topics I discuss. Read the entire blog post, but here’s my answer to that question.
You are also forgoing the upside of hiring employees.
In the end, if there is a dispute, the court will decide.
Learn more about W2s versus 1099s here.
Mark your calendars with date changes or sign up for our payroll date change alerts and you’ll get automatically notified of any dates that may change your payroll submissions.
Month | Pay Date | Day of the Week | Holiday | Get Payroll in By |
---|---|---|---|---|
January | 1/1 | Tuesday | New Year's Day | 12/27 |
1/21 | Monday | Martin Luther King, Jr. Birthday | 1/16 | |
February | 2/18 | Monday | Presidents Day | 2/13 |
March | - | - | - | - |
April | - | - | - | - |
May | 5/27 | Monday | Memorial Day | 5/22 |
June | - | - | - | - |
July | 7/4 | Thursday | Independence Day | 7/1 |
August | - | - | - | - |
September | 9/2 | Monday | Labor Day | 8/28 |
October | 10/14 | Monday | Columbus Day | 10/9 |
November | 11/11 | Monday | Veterans Day | 11/6 |
11/28 | Thursday | Thanksgiving Day | 11/25 | |
11/29 | Friday | Day After Thanksgiving | 11/26 | |
December | 12/25 | Wednesday | Christmas Day | 12/20 |
*When a federal holiday falls on a Saturday, it is usually observed on the preceding Friday. When the holiday falls on a Sunday, it is usually observed on the following Monday.
Payroll Questions and Other Helpful FAQs
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The Payroll Book: A Guide for Small Businesses and Startups
Small Business Short Course (Employees Book 1)
Starting a New Business: Accounting, Finance, Payroll, and Tax Considerations
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Charles Read, CPA, USTCP, IRSAC
President/CEO...
Charles Read, CPA, USTCP, IRSAC
President/CEO...
Charles Read, CPA, USTCP, IRSAC
President/CEO...