You may not have noticed in the news, but the issue of “independent contractors” is becoming a hot item. This is where a company will forego making payroll tax payments and just hope the individual will pay their own way.
Make no mistake, one way or the other, tax on hourly wages must get paid. Either the company deducts them from a paycheck and makes monthly 941 payroll tax payments or the individual needs to make self employment tax payments. The IRS has determined there are three criteria for consideration when deciding whether an individual is an employee or independent contractor.
- Behavioral – Does the individual decide where to be, when to be there and what to do when performing their duties?
- Financial – Is the individual completely responsible for tracking their finances, negotiating their rate, paying for their own expenses?
- Type of Relationship – Does the individual conduct all aspects of their part of the business relationship with regards to contracts, starting, leaving, paying taxes?
If the answers to all of the above is Yes, without any reservations, the individual may be considered an independent contractor. But any shades of gray will pull toward requiring the company to pay the payroll taxes. One rule of thumb would be, when looking at the operating financial statement for the business, the cost of payroll should be one of the bigger, if not the largest cost of doing business.
The reason this is timely has to do with the loss of revenues to both Federal and State budgets. In an effort to recoup shortfalls, agencies are taking a hard look at companies that try to avoid making their necessary tax payments. And here is the kicker, if a company is found to have avoided paying payroll taxes and is levied with past due amounts plus penalties and interest – that liability follows the company owner until it’s paid. Liquidating the company will not resolve unpaid payroll taxes.
Tags: 1099, 941, FICA, Medicare, Payroll taxes, Social Security
Posted in Accounting and Taxes, Compliance | No Comments »
