Hiring Workers

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Employer's Obligations When Hiring Workers

There a two types of workers that may provide services for your business:

  1. Employees
  2. Independent Contractors

Employers have certain tax and legal requirements related to each type of worker.

Employment Taxes:

The employer must withhold and deposit federal and state income taxes, social security and Medicare taxes (called FICA taxes), from each employee's gross pay

Certain states do no impose a personal income tax, for example, Nevada, Texas, and Florida. Check your state requirements

Then, there are employment-related taxes that only the employer is responsible for, such as:

The above taxes are not withheld form an employee's pay. Only the employer pays these taxes and files the related tax returns.

Here are common employment tax returns that must be filed by the employer:

Caution!

The IRS takes violations of employment tax obligations seriously. It will impose heavy penalties for willful violations of the law.

If your business runs into a cash crunch, make sure your employment taxes receive top priority in your list of items that must be paid. In other words, avoid the temptation of borrowing money slated for employment taxes to pay other items.

Legal:

If you have employees you are required by each state to carry workers' compensation insurance to cover the costs associated with job-related injuries of employees.

Sole proprietors are not treated as employees for workers' compensation purposes and therefore, are not eligible for coverage.

However, some states allow sole proprietors to opt in to a similar program. Check with your state.

Insurance premiums vary depending on the degree of risk associated with each employee's job.

Jobs that pose a higher degree of risk for physical injury will require a higher premium. Premiums for low risk jobs, such as office workers, will be lower.

Independent Contractors:

There is no requirement to withhold taxes from payments made to independent contractors.

Independent contractors pay their own taxes on their self-employment income.

Backup Withholding:

Although you are not generally required to withhold federal income taxes from payments made to independent contractors, there is an exception.

If an independent contractor does not provide you with his/her tax identification number (TIN) you are required to withhold federal income taxes from payments made to him/her. This is referred to as backup withholding. The backup withholding rate for 2008 is 28% of amount paid.

When issuing Form 1099-MISC to the independent contractor after year-end, you include the gross amount paid and the federal income taxes withheld on the gross amount in the boxes provided on the form. The taxes are paid to the U.S. Treasury.

Use Form W-9, Request for Taxpayer Identification Number and Certification for 2011 to request a TIN from a taxpayer if the independent contractor does not provide it to you voluntarily.