Payroll Service For Small Businesses - The question of whether a worker is an independent contractor
or employee for federal income and employment tax purposes is a complex one. It
is intensely factual, and the stakes can be very high. If a worker is an
employee, the company must withhold federal income and payroll taxes, pay the
employer's share of FICA taxes on the wages plus FUTA tax, and often provide
the worker with fringe benefits it makes available to other employees. There
may be state tax obligations as well. These obligations don't apply for a
worker who is an independent contractor. The business sends the independent
contractor a Form 1099-MISC for the year showing what he or she was paid (if it
amounts to $600 or more), and that's it.
Who is an “employee?” There is no uniform definition of the term.
Under the common-law rules (so-called because they originate from court
cases rather than from a statute), an individual generally is an employee if
the enterprise he works for has the right to control and direct him regarding
the job he is to do and how he is to do it. Otherwise, he is an independent
contractor.
Some employers that have misclassified workers as independent
contractors are relieved from employment tax liabilities under Section 530 of
the 1978 Revenue Act (not the Internal Revenue Code). In brief, Section 530
protection applies only if the employer: filed all federal returns consistent
with its treatment of a worker as an independent contractor; treated all
similarly situated workers as independent contractors; and had a “reasonable
basis” for not treating the worker as an employee. For example, a “reasonable
basis” exists if a significant segment of the employer's industry has
traditionally treated similar workers as independent contractors. Section 530
doesn't apply to certain types of technical services workers.
Individuals who are “statutory employees,” (that is, specifically
identified by the Internal Revenue Code as being employees) are treated as
employees for social security tax purposes even if they aren't subject to an
employer's direction and control (that is, even if the individuals wouldn't be
treated as employees under the common-law rules). These individuals are agent
drivers and commission drivers, life insurance salespeople, home workers, and
full-time traveling or city salespeople who meet a number of tests. Statutory
employees may or may not be employees for non-FICA purposes. Corporate officers
are statutory employees for all purposes.
Individuals who are statutory independent contractors (that is, specifically
identified by the Internal Revenue Code as being non-employees) aren't
employees for purposes of wage withholding, FICA, or FUTA and the income tax
rules in general. These individuals are qualified real estate agents and
certain direct sellers.
Some categories of individuals are subject to special rules because of
their occupations or identities. For example, corporate directors aren't
employees of a corporation in their capacity as directors, and partners of an
enterprise organized as a partnership are treated as self-employed persons.
Under certain circumstances, you can ask IRS (on Form SS-8) to rule on
whether a worker is an independent contractor or employee.
If you'd like to discuss with me how these complex rules apply to your
business, to make sure that none of your workers are misclassified, please call
my office to arrange for an appointment.
Please call if you would like to explore any
of these issues more fully. I
look forward to hearing from you. Click this link to view our YouTube video http://youtu.be/EYJdQtbPZAI
Amare
Berhie
(651)
621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396
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