Know your employees…Being your own boss, it’s what many Americans dream of, but few get to accomplish it. But the freedom that it gives also comes with some heavy responsibilities. And running your own business means you have to pay other people to work for you. One of the stickier tax traps that an IRS-Hitman can set for the small businessperson is how to report the people that work for them on their taxes.
A or B…If you own your own business then you have two types of people that work for you, and two different ways of claiming them on your taxes: You have independent contractors, whom you usually pay for a single job or service. You also have your regular employees that work for you. Each of these workers has to be filed in completely separate ways when you report your taxes. But which is which?
Your regular employees
or 941 payroll employees
are easy. They work for you and you issue them a regular paycheck with taxes taken out.
The independent contractor is a bit trickier. Small business owners can get into major trouble by claiming what should be 941 employees as contractors. So what is the difference?
A misconception…You may think that if you pay someone per job, rather than paying them on a regular basis means they’re contractors. For example, you have someone come in to make improvements on your place of business. You pay him for the job and then he goes on to the next contract. He would be a contractor. Now if you have that same person on call for any job that your business needs, and he makes him or herself available to you at any time then he/ she is a 941 employee.
A quick test…Although it is a little more complicated, the IRS-Hitman does have a good rule of thumb, although you should always consult the tax code to make sure. The simple rule of thumb is that if you only use someone for a single job, or they work for more people than just you they’re a contractor. If they work exclusively for you, or are on a regular pay schedule they’re regular employees.
More examples include: your attorney is a contractor; your in house accountant is a regular employee. The company that designed your website is a contractor, your IT guy is an employee.
Make sure, again…Follow that simple rule of thumb, and research anyone who’s status is questionable and you should be able to avoid the pitfall of misfiling your 1099 taxes.
Now you have the smoking gun…Use it!