Gregory L Buhrow
Certified Public Accountant
A PROFESSIONAL CORPORATION
Basically this boils down to whether you consider your worker's employees or independent contractors.
If they are employees, then you will need to withhold payroll tax (Social security and Medicare) and be subject to unemployment tax for Federal and state purposes. Independent contractors do not require payroll tax withholding. The IRS has provided a series of twenty factors that may assist you in the classification of your workers. However, the IRS also prefers that all workers be classified as employees for employment tax purposes.
Rule of Thumb: If you have the right to direct and control (whether you exercise it or not) your worker, then that worker is probably an employee.
Payroll Tax Withholding and Reporting
If your workers are classified as employees, then you need to withhold payroll taxes from each wage/salary payment and remit those withheld taxes to the IRS quarterly, monthly or semi-weekly, depending upon the amount of withholdings. Further, you need to report to the IRS and state unemployment agencies quarterly, the amount of wages paid and taxes withheld. For Federal purposes that report is known as Form 941.
When you file your annual income tax return, whether you are a sole proprietor, corporation, partnership or other entity, you will need to properly report all wages and payroll taxes so that it agrees to the quarterly Form 941's. If you don't, you will receive a letter from IRS and it could be an audit trigger.
As stated above, you do not withhold employment tax or income tax withholding from an independent contractor, with one exception.
If an independent contractor does not complete Form W-9 (Request for Taxpayer Identification Number) then you are required to withhold 28% of the amount due, remit that amount to the IRS and report it on Form 945.
If you pay the contractor more than $600, you are required to report this amount on Form 1099-NEC and report the payments to the IRS on Form 1096.
Retirement and Benefits
Some plans are contributory (paid by the employee) and some are not, while some are both.
Some benefit contributions are not subject to Social Security and Medicare and some are.
Some benefit plans are not subject to income tax withholding.
You get the picture ...
We work with small businesses and benefits planners to provide information and discuss tax ramifications of different retirement and benefits alternatives.
How do expenses get reimbursed to employees? Do they fill out an expense report or can you just give them an "allowance" regularly?
The answer is "Yes" but there are payroll tax implications to each.
An 'accountable plan' requires expense reporting and has no payroll tax implications whereas the provision of a periodic allowance is a 'non-accountable plan' and requires employment tax withholding.
There are other issues regarding payroll but the aforementioned are the major ones. You may be asking yourself "Why is it so hard?" Well, the best answer is that the government makes it this difficult, which is why you need a professional who can guide you through this minefield.