Small Business Stress: Part 3
This is the third blog in our series on common stumbling blocks for start-ups and small businesses. The other blogs, about appropriately delegating business duties and planning ahead in business, can be found here:
Our goal is to be conversational and to provide readers with thinking points to kickstart important conversations in their organizations. If you'd like to have a conversation with one of our advisors on this or any other topic, please contact us via our website at www.WTCPA.com. Any stories told in these posts are fictional but may sound familiar to many small business owners.
If you ask any Mid-MO CPA or business advisor in Central Missouri for a short list of things every small business owner must understand, a common item will certainly be "Employee vs. Contractor Rules." Essentially, this speaks to when someone must be on payroll, and when it is appropriate for them to be a 1099-contractor. It is critical that when a business pays for labor, such payments are compliant with federal and state regulations. A comprehensive discussion of these regulations should be held with your advisors, but in the following paragraphs, we'll introduce you to some important concepts.
First, understand that when you hire an employee, you are committing to more than simply paying their hourly wage or salary. Employee wages are generally subject to several types of payroll and withholding taxes, and employers must have a plan for budgeting, calculating, withholding, remitting, and reporting these taxes. In addition, employees may be subject to garnishments for things like unpaid taxes, medical bills, or child support -- and if they are, employers may be required to withhold portions of an employee's paycheck and submit payments on the employee's behalf. In addition, depending on your industry and number of employees, you should be aware of workers' compensation insurance requirements. Failure to understand your requirements as an employer can lead to significant fines and penalties, and could represent a serious risk to your business.
If payroll tax and workers' comp requirements make employees sound like an expensive proposition, it is important to understand that simply treating workers as independent contractors may be even more expensive, because it may not be legal to do so. Worker classification (employee vs. contractor) is critical because it determines if the employer must withhold taxes from payments to the worker. Employees are subject to tax withholdings, and contractors generally are not. If a business classifies someone as an independent contractor without a reasonable basis for doing so, the business can later be required to pay payroll taxes, potentially with penalties and interest, on past amounts paid, going back several years.
Properly classifying workers is crucial, and so is understanding some general rules to guide these classification. The general rule is that if your business pays someone to do a job, they are a contractor only if they get to determine how the work gets done, when it gets done, and by what processes it gets done. If you dictate the timing, process, and results, then you are probably working with an employee. You are not incorrect to think this guideline sounds vague. It is, and the specific facts and circumstances of every case are the deciding factors. However, if you consider the following when you hire a worker, you can ensure proper classification:
• If you give instructions such as when and where to work, what tools to use, or where to buy supplies, you are likely an employer. Contractors generally decide those things independently.
• If you provide training to a worker, you are likely an employer. Contractors generally choose their own methods.
• If you pay the worker hourly, salary, or via commission, you are likely an employer. Contractors generally work for a fixed, contracted fee.
• If you lack a written contract specifying the terms of the relationship, you are more likely to be an employer. Specific written contracts generally indicate the presence of an independent contractor.
• If you are providing paid time off, retirement benefits, or health insurance, you are likely an employer. Such benefits are generally not available to contractors.
• If the expectation is that your relationship will continue indefinitely, rather than end at some specific contracted period, you are more likely to be an employer. Contractors generally work for a specified period of time or until a specific point of completion.
• If the worker does not have any risk of loss or liability, he or she is generally an employee.
Contractors regularly carry their own insurance and accept risk for their errors, omissions, etc.
Proper worker classification from the outset of a business is critical; so studying, considering, and understanding these points is very valuable to business owners. Worker classification remains a focus of taxing agencies, and investigations leading to the reclassification of payments to contractors as wages is often crippling to small businesses. If you would like a consultation with one of our small business advisors to help ensure your compliance in this area, please request one at www.WTCPA.com.
More information is available on this topic on the IRS website, keyword search "worker classification."
Written By: Adam Wolfe, CPA
Our goal is to be conversational and to provide readers with thinking points to kickstart important conversations in their organizations. If you'd like to have a conversation with one of our advisors on this or any other topic, please contact us via our website at www.WTCPA.com. Any stories told in these posts are fictional but may sound familiar to many small business owners.
If you ask any Mid-MO CPA or business advisor in Central Missouri for a short list of things every small business owner must understand, a common item will certainly be "Employee vs. Contractor Rules." Essentially, this speaks to when someone must be on payroll, and when it is appropriate for them to be a 1099-contractor. It is critical that when a business pays for labor, such payments are compliant with federal and state regulations. A comprehensive discussion of these regulations should be held with your advisors, but in the following paragraphs, we'll introduce you to some important concepts.
First, understand that when you hire an employee, you are committing to more than simply paying their hourly wage or salary. Employee wages are generally subject to several types of payroll and withholding taxes, and employers must have a plan for budgeting, calculating, withholding, remitting, and reporting these taxes. In addition, employees may be subject to garnishments for things like unpaid taxes, medical bills, or child support -- and if they are, employers may be required to withhold portions of an employee's paycheck and submit payments on the employee's behalf. In addition, depending on your industry and number of employees, you should be aware of workers' compensation insurance requirements. Failure to understand your requirements as an employer can lead to significant fines and penalties, and could represent a serious risk to your business.
If payroll tax and workers' comp requirements make employees sound like an expensive proposition, it is important to understand that simply treating workers as independent contractors may be even more expensive, because it may not be legal to do so. Worker classification (employee vs. contractor) is critical because it determines if the employer must withhold taxes from payments to the worker. Employees are subject to tax withholdings, and contractors generally are not. If a business classifies someone as an independent contractor without a reasonable basis for doing so, the business can later be required to pay payroll taxes, potentially with penalties and interest, on past amounts paid, going back several years.
Properly classifying workers is crucial, and so is understanding some general rules to guide these classification. The general rule is that if your business pays someone to do a job, they are a contractor only if they get to determine how the work gets done, when it gets done, and by what processes it gets done. If you dictate the timing, process, and results, then you are probably working with an employee. You are not incorrect to think this guideline sounds vague. It is, and the specific facts and circumstances of every case are the deciding factors. However, if you consider the following when you hire a worker, you can ensure proper classification:
• If you give instructions such as when and where to work, what tools to use, or where to buy supplies, you are likely an employer. Contractors generally decide those things independently.
• If you provide training to a worker, you are likely an employer. Contractors generally choose their own methods.
• If you pay the worker hourly, salary, or via commission, you are likely an employer. Contractors generally work for a fixed, contracted fee.
• If you lack a written contract specifying the terms of the relationship, you are more likely to be an employer. Specific written contracts generally indicate the presence of an independent contractor.
• If you are providing paid time off, retirement benefits, or health insurance, you are likely an employer. Such benefits are generally not available to contractors.
• If the expectation is that your relationship will continue indefinitely, rather than end at some specific contracted period, you are more likely to be an employer. Contractors generally work for a specified period of time or until a specific point of completion.
• If the worker does not have any risk of loss or liability, he or she is generally an employee.
Contractors regularly carry their own insurance and accept risk for their errors, omissions, etc.
Proper worker classification from the outset of a business is critical; so studying, considering, and understanding these points is very valuable to business owners. Worker classification remains a focus of taxing agencies, and investigations leading to the reclassification of payments to contractors as wages is often crippling to small businesses. If you would like a consultation with one of our small business advisors to help ensure your compliance in this area, please request one at www.WTCPA.com.
More information is available on this topic on the IRS website, keyword search "worker classification."
Written By: Adam Wolfe, CPA
Our Success Stems From Your Success
For tax preparation services you can count on, call:
Sedalia -- (660) 827-4990
Marshall -- (660) 886-6815
Camdenton -- (573) 346-6822
Lake Ozark -- (573) 964-5739
Check out our website: www.WTCPA.com
Follow us on:
