We categorize workers in many ways: part-time, on-call, day workers, full-time employees, independent contractors. So what paperwork and taxes are required for each?
The IRS has two classifications - employees and non-employees. On the surface,the IRS makes it pretty simple - if a worker doesn't fall into the non-employee category, she is automatically an employee.
IRS rules and laws determine whether a worker falls into the non-employee category - not agreements between workers and businesses - or even contracts. Certain workers are always non-employees (called statutory non-employees). These include
The other non-employee is an independent contractor. Before we get to describing independent contractors, please note that part-time, on-call, and day workers are all employees, and you are their employer. So even though a worker may only work for you for a very short period of time, they are employees and you have to file employer paperwork.
So what is an independent contractor? Independent contractors operate their own business, take entrepreneurial risk, get their own clients, and have their own tools. They are generally paid by the job, not by the hour. They have the right to use others to do the actual work. Independent contractors can't be "fired" - they can only have their contract terminated for cause.
Some workers must be classified as employees even if they meet the criteria above. The IRS has four groups that are automatically employees:
The $600 rule Some employers erroneously think that you have to pay someone $600 before they become an employee. The $600 rule only applies to the requirement for filing a W-2. Usually this applies to day laborers. These workers are still employees and you are liable for providing workers compensation insurance, deducting employee taxes, and paying employer taxes. While it is hard to track and enforce these requirements, you should be aware that legally you are their employer.
Click here for the criteria used by the IRS to determine whether a worker is an independent contractor.
Independent contractor / employee checklist - developed by the Society of Human Resource Management
Click here for a sample independent contractor agreement.
The information here is a summary and is provided as a public service under contract with Startupkits.com. Please visit the IRS website for complete information.
Many businesses are learning that the workers that they thought were independent contractors are being re-classified as employees by the IRS and courts. There have been many myths about independent contractors that have caused businesses to misclassify the workers. The truth is that independent contractors must be in business for themselves - take entrepreneurial risks and get enterpreneurial rewards. Businesses cannot "do something" to make their workers independent contractors - it is like putting lipstick on a pig and calling the result a horse.
In the past, it has been very costly for businesses to correct this mistake - because they would be charged huge penalties that threatened the business's financial future. So, in 2011, the IRS launched a Voluntary Classification Settlement Program (VCSP), that allows businesses to pay less than 10% of what they would owe if they are audited and caught by the IRS.
Here are over 15 videos from the IRS to help small business employers hire employees.https://www.irsvideos.gov/SmallBusinessTaxpayer/Employers
Here is a more extensive video from the IRS- Proper Worker Classification - IRS video
Here is information about the IRS Voluntary Settlement Program
Our combat servicemen and women are home, but now face a huge hurdle: they need to find jobs and readjust to civilian life. ABC News reports that veterans' unemployment rate is 3% higher than the national average.
Businesses can help in three ways:
Here are additional resources:
You can find employees by contacting your nearest One Stop Career Center. These centers help work with employers to find employees that match the business' need. They also help individuals with resumes, job hunting skills, and interviewing skills.
Your nearest One Stop Career Center is:
Defining the job correctly and hiring the right employee are critical to your business success. Poor job descriptions lead to confusion and frustration by all. Bad employee choices cost companies lost productivity. Firing an employee can cause labor disputes and reduce company morale. We have two free tools to help you determine the job descriptions:
Job Description Writer from the Career OneStops
Find the right person: Interactive Hiring Tool from the SME Toolkit
If you hire workers from one of the eligible groups below, you can receive up to 40% of their first year's wages as a federal tax credit.
What workers are eligible?
There are 9 eligible groups:
*For information about qualifying unemployed veterans and disconnected youth, visit www.doleta.gov/business/incentives/opptax/
How much is the credit?
40% of the employees wages up to $6,000. (Up to $12,000 for Service disabled employees; up to $3,000 for qualified summer youth). If the workers is a long term recipient of Temporary Assistance to Needy Families, you can get additional tax credits.
Requirements You must complete the paperwork and establish eligibility BEFORE you hire the employee. Employees must be retained at least 400 hours for the 40% tax credit. If they are retained for 120 to 400 hours, a 25% tax credit is available.
The federal government's federal bonding services provide 6 months of bonding insurance to protect employers against employee dishonesty. The program is designed to eliminate the risk of hiring at-risk job applicants including: ex-offenders, recovering substance abusers (alcohol or drugs), welfare recipients and other persons having poor financial credit, economically disadvantaged youth and adults who lack a work history, individuals dishonorably discharged from the military, and anyone who cannot secure employment without bonding.
The bonding service is user-friendly and covers any type of stealing: theft, forgery, larceny or embezzlement. There is no cost to the employer. After 6 months, the employer can convert the policy to the private sector and pay any premiums.
Click here for more information
The US Department of Labor tracks the pay rates for 850+ jobs and provides you the average pay nationwide and in your area.
To use this tool: