How to Hire Without IRS Ire

There’s loads to do when you take a new employee onboard, and it isn’t all training and making sure they’re meshing with your team. You also need to make sure they’re properly taken care of in terms of paperwork and the IRS, or you and your business could be facing some serious problems down the road. Fortunately, the requirements are pretty straightforward – just make sure you dot the “i”s and cross the “t”s.

“With employees, the IRS (and your state) will be looking to see if you are filing payroll tax returns and making bank deposits of your employees’ taxes,” writes small business tax experts Frederick W. Daily and Jeffrey A. Quinn. “Every employer must withhold payroll taxes from employees’ wages, deposit the withheld employee income taxes, together with the business’s share of Social Security and Medicare taxes, to the accounts of the IRS and the state, and file various reports with the IRS, Social Security Administration, and the state.”

Hire-without-irs-ireSimple enough, right? And yet many small businesses fail to properly handle payroll taxes and report filings despite the often severe penalties they face. Once you get a handle on proper payroll paperwork, it’s easy for you — or your bookkeeper — to keep up with. Set the reminders you need and don’t miss your deadlines.

Also, remember that certain employee benefits must be counted as compensation, and there might be additional paperwork that needs to be filed with the IRS if you offer contributions to 401(k) plans or other retirement or pension funds. The Internet is helping to streamline the filing process, though, so take a look and see if you can improve your efficiency with a little connectivity.

“Employment tax returns may be filed electronically. These include Form 940 (Employer’s Annual Federal Unemployment Tax Return), Form 941 (Employer’s Quarterly Federal Tax Return), and Form 944 (Employer’s Annual Federal Tax Return),” says Barbara Weltman, a tax law specialist. “You can e-file employment tax returns through a third-party transmitter using the 04-1, 941, and 944 On-Line Filing Program, Or you can authorize a reporting agent to prepare, sign, and e-file for you.”

Having a third party handle your employee tax paperwork can be of tremendous benefit to most small businesses. If you have an accountant or bookkeeper you work with already, or if your business is large enough to use a third-party payroll processor, see what they can do in terms of filing. The small added cost can be well worth the reduced risk of error and the time you’ll save.

Finally, the IRS has taken a keen interest in small businesses and their use of independent contractors. You need to know the difference between a contractor and an employee if you want to avoid substantial tax liabilities and penalties for disregarding employment laws.

“The IRS uses three characteristics to determine the relationship between businesses and workers,” states the IRS website. “Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job. Type of Relationship factor relates to how the workers and the business owner perceive their relationship.”

The more control you have over how your worker does their job, the more likely they are an employee, even if you hired them as a contractor. Make sure you know the difference and keep yourself out of the IRS’ sights.


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