EMPLOYER'S TAX TIPS

DETERMINING EMPLOYMENT STATUS

You may on occasion have paid another person for doing a job for you. Without even realizing it, you may have become an employer.

If you've paid an individual in any of the capacities listed below, you'll want to learn more about being an employer.

• If an individual works in your home in a capacity such as housekeeper or child care provider.

• If you own or rent a farm and engage individuals to perform farm labor.

• If you own a business and pay individuals to perform work for you.

• If you own rental property and engage individuals to perform services related to the rental, maintenance, repair or improvement of the property.

EMPLOYEE OR INDEPENDENT CONTRACTOR?

Someone who works for you may be either an employee or an independent contractor. What's the difference? In general terms:

• An independent contractor is a person with whom you make arrangements to have a specific job accomplished, usually by a specific deadline. How the job is accomplished is determined by the independent contractor.

• An employee is also a person who performs a job for you. However, you have the right, whether you exercise it or not, to specify not only what is to be accomplished, but also how it's to be done.

THE "20 FACTOR" TEST

Unfortunately, there's no real "black or white" method of deciding who's an independent contractor and who's an employee. Each situation must be considered on the merits of its individual facts and circumstances. The IRS uses 20 factors to help make this determination. Some of these factors are listed in this page. No single factor alone can be used to decide whether your worker is an employee or an independent contractor.

All factors must be taken into account in making this determination.

• Are the worker's services important to the success or continuation of your business? Someone providing a service that's integral to your business is usually an employee. Someone providing a one-time service that's peripheral to your business is usually an independent contractor.

• Do you have a continuing relationship with the worker? An ongoing work relationship indicates that the job is integral to your business and that the worker is an employee.

• How is the worker paid? An employee is generally paid by the hour, week or month. An independent contractor is more often paid by the job or on a straight commission.

• Right to terminate. A contract with an independent contractor will usually provide for penalties if either party terminates the working relationship before the job is completed. An employee may quit or be fired without either party incurring a penalty for failure to complete a contract.

• Who decides what hours are to be worked? An employee must work the hours you've established. An independent contractor is free to work the hours he or she chooses, so long as the job is completed on time.

• Can the worker realize a profit or loss? An employee receives a set wage. An independent contractor's net profit or loss is affected by costs incurred in completing the contracted job.

• Does the worker offer his or her services to the general public or work for more than one person? An employee generally works only for you and doesn't solicit business from the general public.

TAX REQUIREMENTS

Whether the people you hire are independent contractors or employees, certain tax filing requirements must be met.

If your workers are independent contractors:

• By January 31, you must give Form 1099-MISC to any independent contractor to whom you paid $600 or more.

• By the end of February, you must file with the IRS Form 1096 and Form 1099-MISC for any independent contractors to whom you paid $600 or more during the year.

If your workers are employees, file the following forms:

• You must send Forms W-2 to your employees by January 31, following the year in which the wages were paid.

• By the end of February, you must file Forms W-2 with the Social Security Administration, along with Form W-3.

• If you are liable for unemployment taxes, file Form 940, Employer's Annual Federal Unemployment Tax Return.

• If you employ workers in your home, file Schedule H, Household Employment Taxes.

• If you employ workers on your farm, file Form 943, Employer's Annual Tax Return for Agricultural Employees.

• If you employ workers in your business, file Form 941, Employer's Quarterly Federal Tax Return.

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