Let’s begin with what the Internal Revenue Service defines as an employee. The most common employee is the common law employee. Common-law employees are actually not identified in the tax statutes. Rather these employees are products of judicial evolution. Under common-law rules, anyone that performs services for you is your employee, “if you can control what will be done and how it will be done.” A key factor in determining whether a particular worker should be considered a common-law employee is the degree of control that you have or exercise over the worker. IRS regulations clarify that in making a determination on whether a worker is a common-law employee, the IRS must consider “the particular facts of each case.”
Statutory Employees generally are independent contractors under common law rules. Nevertheless, certain statutory employees may be treated as employees by statute for certain employment tax purposes. In order to be treated as statutory employees, they must fall within any one of the following categories and meet three conditions regarding Social Security and Medicare Taxes later. These four categories are
· Agent drivers or commission drivers engaged in distributing particular products
· Full-time insurance salespersons
· So-called homeworkers who perform work on materials or goods provided by their principles according to specifications set by principles
· Traveling salespersons (yes they still exist)
You must withhold Social Security and Medicare taxes from the wages of statutory employees if all three of the following conditions are met:
· The service contract states or implies that substantially all of the services are to be performed personally by them
· The do not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation facilities)
· The services are performed on a continuing basis for the same payer
Another class of worker is a, statutory nonemployee. Statutory nonemployees are workers who are specifically excluded from the definition of employee by statute. Among the wide range of statutory nonemployees are direct sellers. These workers, according to contract and on a commission or other performance basis, sell products personally, or through others.
Basically, statutory nonemployees are broken down into three categories: Direct sellers, licensed real estate agents, and certain companion sitters. Direct sellers and licensed real estate agents are treated as self-employed for Federal tax purposes, including income and employment taxes, if:
· Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the numbers of hours worked, and
· Their services are performed under a written contract providing that they will not be treated as employees for Federal tax purposes
Companion sitters who are not employees of a companion sitting placement service are generally treated as self-employed for all Federal tax purposes.
Finally, we have independent contractors. The IRS defines independent contractors as people who are an independent trade, business, or profession in which they offer services to the general public. Whether these people are treated as independent contractors or employees depends on the facts in each case. The general rule is that a person is truly independent if you have the right to control or direct only the result of the work and not what will be done or how it will be done. These workers are classified as such because they have greater flexibility in time and matter in which they perform their work.
Typically, when you hire an employee, or even if you compensate yourself if your business is structured as a C-Corporation or an S-Corporation, you are required to withhold taxes from your employee, and remit them to their respective agencies when they are due. The first thing you have to do when the employee is hired is have them fill out Form W-4 (Employee’s Withholding Allowance Certificate). This form details the employee’s name, Social Security Number, address, and withholding exemptions. The state in which you employ your workers may have a similar form for the employee to fill out. You should check with your state’s Department of Revenue. Employees are subject to Social Security, Medicare, Federal Income Tax, and State Tax (if applicable). The Social Security Rate is 6.2% of the gross wages that you pay your employee. Medicare Tax is 1.45% of the gross wages that you pay your employee. Federal income tax is determined by how your employee filled out Form W-4. In order to calculate the amount of Federal tax that you are required to withhold, you need to consult IRS Publication 15.
In addition to withholding these taxes, as the employer you have to match the Social Security and Medicare that was withheld from your employee’s paycheck. Your matching contribution is 100% of what you withheld from your employee’s check. In addition to the matching taxes, you are required to pay State Unemployment (SUTA), and Federal Unemployment (FUTA). SUTA and FUTA are not withheld from your employee; rather it is your expense. You pay SUTA and FUTA taxes quarterly or yearly.
These are the basics to employees.
For more information visit www.smalleynco.com
For more information visit www.smalleynco.com
If you have any questions you can email Craig W. Smalley E.A.
Author of the books: It Starts With an Idea – Tax Tips for Small Businesses available on Nook and Kindle, The Ultimate Real Estate Investor Tax Guide, available on Nook and Kindle, The Complete Guide to the New Tax Law – American Taxpayer Relief Act of 2012 available on Nook and Kindle, Everything You Wanted to Know about the IRS – Audits, Appeals and Collections available on Nook and Kindle, Tax Avoidance is Legal! The Complete Guide to Individual Income Tax available on Nook and Kindle, The Complete Guide to the Affordable Care Act’s Tax Provisions available on Nook and Kindle, The Complete Guide to Retirement Plans for Small Businesses available on Nook and Kindle, The Complete Guide to Estate, Gift and Trust Taxation, available on Nook and Kindle, and The Complete Guide to Hiring an Accountant, available on Nook and Kindle.