The irs recently put out a new release warning business owners to correctly identify workers as employees or to correctly identify them as independent contractors if a business owner misclassified an employee as an independent contractor then that business can be held liable for their share of employment taxes for that.
Worker plus any fees and interest that may apply for paying late and no one wants that in this video i'll break down who should be paid as a w-2 employee and who should be paid as a 1099 contractor in your business and the tax differences of both welcome back to the channel i'm crystal.
A cpa at life accounting where we're all about decreasing your taxes and increasing your income if that sounds remotely interesting to you then please go ahead and subscribe to our channel so you don't miss out on future videos and if you're ready for me to break down the differences between a w-2 employee and a 1099 contractor so you can stay out of.
Irs trouble then go ahead and hit that like button for me all right so according to the irs in order to correctly classify a worker as either an employee or contractor you have to look at the relationship between the worker and the business and there are three categories to consider first is behavioral control meaning does the.
Business control what the worker does does the business control how the worker does their job for example most government workers tend to be employees since the government usually has a set way of doing things and therefore their workers must follow a specific process the government is controlling what the worker does and how they do it or.
Another example perhaps you own a restaurant and you want all of your servers to always greet customers with water at the table and explain the daily specials to them also want your servers to wear specific attire and work at certain times in this case the servers would be considered employees from a behavioral control perspective since you.
Are controlling what the server does and how they do it on the other hand let's say your office ac broke down and you hire someone to fix it you don't know anything about fixing an ac unit so you trust the worker you hired to use their expertise to get the job done in this case the hvac professional would be a contractor or even a lawyer or.
Accountant you use regularly for services in your business because you're not really controlling what they do and how they do it those individuals are considered contractors the second category to consider when deciphering if your workers should be w2 employees or 1099 contractors is financial control meaning does the business control the.
Financial aspects of the worker's job are there business aspects of the worker's job controlled by the business for example you may be hiring for an assistant position in your company and have decided that you're going to pay this person 20 per hour so the candidates that you are interviewing are already aware of the.
Compensation you're offering you are essentially controlling the financial aspect of the position furthermore it is agreed that the assistant will have to go to the store sometimes and pick up office supplies like ink or paper that you will reimburse them for again in this capacity you are controlling the financial aspect of the worker and they.
Should be considered an employee on the flip side contractors generally set their own prices and business owners can either accept or reject those prices granted price negotiations do happen but is usually led by the contractor's pricing methods also for the most part contractors are not reimbursed for job expenses unless agreed on in the.
Contract so if you hire a photographer the photographer will set their own fee and you wouldn't be required to buy the camera they used to complete the job though they may require you to cover the cost of gas if traveling to a location but all of this is the photographer or contractor controlling the financial aspect of the work the third category to.
Consider with 1099 versus w-2 is the relationship between the worker and the business meaning are there any written contracts who is preparing the contracts employment contracts versus service contracts are there any employee benefits like health insurance or pension plans provided also will the relationship continue and is the work.
Performed a key aspect of the business there is a lot to think about with the relationship aspect but let's start with the contract if you as the business owner are requiring a worker to sign a work contract with your company's policies and procedures then that worker is an employee remember when it comes to determining an employee versus a.
Contractor control is the number one factor having someone sign your contract demonstrates that you are the one in control of the relationship if a worker is wanting you to sign their contract then they are the one in control of the relationship and would be considered a contractor next are the benefits this one is pretty straightforward businesses.
Simply don't offer benefits to contractors none that i've seen businesses only offer benefits like paid vacation and insurance to employees and lastly will the relationship continue once the work is done for the most part contractors have a very specific job to do and once that job is complete their relationship with that business is over.
For example when you hire a business consultant they help you with a few questions or key areas of your business and then they're out of there they don't continue to work for you past the initial project they are just a contractor but when you hire an account manager to manage a number of your client accounts in your business.
They are there on an ongoing basis even if a client leaves as the business owner you probably would transfer other clients to that account manager or have them do something else for the business in this case the account manager is an employee of the company since their work is not contingent on them completing one project but is more of a continuous.
Relationship which can help answer the question is the workers role a key aspect of the business when thinking about what services and products you sell is the work performed by the individual necessary to provide those goods and services well in a restaurant yes servers are a key component of that.
Business someone fixing the ac not so much an accountant doing the bookkeeping not so much it's important but not necessary to the day-to-day operations of the business now let's get into some of the tax implications of hiring an employee and hiring a contractor this is the part that the irs cares about when you hire an employee there are certain.
Taxes that the employer is responsible for filing and paying and those are social security medicare and unemployment taxes together known as fica for social security and medicare and fuda for unemployment taxes as an employer you are required to pay 7.65 in fica taxes on the first 142.
800 paid to an employee and six percent in food a taxes on the first seven thousand dollars paid to an employee these are both very important additional costs to consider when hiring an employee these taxes must be paid at least quarterly and reported on federal form 941. there is also an annual form that must be.
Filed and that is form 940. you also have to withhold and submit the employee's share of fica and income taxes based on the w-4 they filled out at the start of their employment lastly you must keep track of the wages and taxes your employees paid so you can file their w-2s employees use form w-2 to prepare their individual income tax.
Returns and you must provide it to them by january 31st for the previous year hiring a contractor is administratively easier no payroll taxes are due on the compensation you pay a contractor the contractor is responsible for paying all related payroll taxes this is where some business owners may find themselves in trouble by misclassifying an employee as.
A contractor they want the control of an employee but not the additional tax cost to have an employee when paying a contractor your only requirement is to file form 1099 by january 31st and this form only reports the contractor's name and the total amount paid to them from your business there isn't a payroll tax component like with having an employee.
Do make sure to have the contractor you hired fill out a w-9 so you have their name address and social security number on file this information would be required on form 1099 but in either case you'll need to keep track of who you're paying and how much if you're a business owner that would like to reclassify your workers as employees for future tax.
Periods for employment tax purposes with partial relief from federal employment taxes the voluntary classification settlement program or vcsp is an optional program that provides business owners with an opportunity to reclassify their workers as employees you must meet certain eligibility.
Requirements and apply by filing form 89 52 and enter into a closing agreement with the irs this is a great option to consider if you have been doing things incorrectly well i hope this was helpful don't forget to comment your questions or thoughts down below and i'll see you in the next video.