| As your business grows, you will probably need to hire | | | | employer's share of the FICA contributions and you |
| employees. Some of the most common tax concerns | | | | won't have to pay unemployment compensation. It |
| involve employee tax issues. When you hire | | | | costs a business 20 percent to 40 percent more per |
| employees, you have to file timely payroll tax returns | | | | worker to treat them as employees. While it may be |
| and make the required tax deposits. | | | | tempting to use independent contractors rather than |
| Payroll taxes include three types of taxes: | | | | employees, the IRS is very aware of the benefits of |
| - Income Tax- You must withhold the proper amount | | | | misclassifying an employee as an independent |
| of income tax from each employee's paycheck | | | | contractor and will impose stiff penalties for those who |
| throughout the year. | | | | break the rule. |
| - Social Security and Medicare Tax or FICA- You | | | | If you plan to use independent contractors rather than |
| must withhold the employee's share of FICA taxes | | | | employees, take the IRS test, which lists 20 factors to |
| from each paycheck and you must match that | | | | determine whether a worker is an employee or |
| amount. | | | | contractor. |
| - Federal Unemployment Tax or FUTA- This tax goes | | | | The following chart gives examples of when workers |
| to the unemployment insurance system and is paid by | | | | should be classified as employees or independent |
| the employer. The employee pays no part of FUTA. | | | | contractors: |
| Always pay your payroll taxes in full and on time. If | | | | Employees |
| you don't, the IRS adds interest and large penalties. | | | | Worker is trained by the employer to perform services |
| The interest and penalties can quickly grow if you don't | | | | in a particular manner |
| pay them immediately. These fees can be enormous | | | | Worker is required to devote substantial time to the |
| and can cause businesses to fail if they cannot afford | | | | employer |
| to pay the fees. | | | | Worker has set hours of work |
| Another common tax issue is misclassifying workers. | | | | Work is done on business premises |
| Workers are usually classified as either regular | | | | The business has the right to fire the worker and the |
| employees or independent contractors. Business | | | | worker has the right to quit at will. |
| owners have payroll tax withholding and reporting | | | | Independent Contractors |
| obligations for all of their employees; however, | | | | Workers services are available to the general public |
| business owners don't have to withhold or make | | | | Worker does work for several businesses at one time |
| contributions for payroll taxes for true independent | | | | Worker is free to work when and for whom he or |
| contractors. | | | | she wants |
| Calling someone an independent contractor saves a lot | | | | Work is done on worker's premises |
| of time complying with IRS reporting requirements. It | | | | The worker can't be terminated early except for |
| also saves money-you don't have to make the | | | | breach of contract. |