I have found some Business Owners are like Pinocchio, they will “obtain” someone to do the work and pay them via 1099. Why not? It is easier and they avoid the additional payroll taxes.
This can be a COSTLY “easy” way out!
Federal and State Governments are watching Small Businesses for this infraction. In the past, Small Businesses have slid under the radar, but recently there has been an increase in small business audits and this trend is going to continue.
In many cases, business owners are paying like they have an independent contractor…
but in reality they have an employee.
Why would the government take the time to find me – a small business?
1. They are losing money
2. Federal taxes fund Social Security and Medicare
3. State taxes fund Disability, Family Leave and Educational programs
Employee paid $15/hr for 30 hour week = $450
Total taxes collected (apx 22%) = $101 $5,252/yr
Total Employer portion of above tax = $52 $2,704/yr
These calculations are for informational purposes and based on New Employer State Rates.
Would you rather pay the ER portion of taxes based on payroll or pay 3X (or more) in Penalties and Interest PLUS pay the back taxes?
Note: if you hire a true Independent Contractor they will pay Self Employment Tax.
Common Sense distinction says: if you direct the worker on how, where, when and what work is being done – they are an employee.
|An Independent Contractor||An Employee|
|• receives compensation for services without withholding taxes
• is liable to report compensation and pay taxes based on the Form 1099 they will receive in January
|• receives pay for time worked and taxes are withheld; business submits taxes on their behalf
• the business is also liable for a portion of Federal and State taxes
• this person will receive a Form W2 in January
|The business legally and directly controls only what must be done||The business will direct and control what must be done and how it is done|
Today the concern is “when they find me do I have the right paperwork to qualify my decision?”
I urge you to contact your Accountant, Payroll Company or Systematic Office Solutions for more information. Do not take this lightly, it is a viable situation that may cost you thousands of dollars.
If you call our office, we will supply a checklist to help determine if your worker is classified as an Employee or Independent Contractor. We will also provide the necessary paperwork to record this decision.