What are the included payroll taxes?
There are different requirements for payroll and taxation in the United States, depending on the state and/or business activity. Federal and state...
It is not easy deciding whether a worker should be treated as an employee or an independent contractor. But the IRS looks at the distinction closely.
For an employee, a business generally must withhold income and FICA (Social Security and Medicare) taxes from the employee's pay and remit those taxes to the government. Additionally, the employer must pay FICA taxes for the employee (currently 7.65% of earnings up to $137,700).*
The business must also pay unemployment taxes for the worker. In contrast, for an independent contractor, a business is not required to withhold income or FICA taxes. The contractor is fully liable for his or her own self-employment taxes, and FICA and federal unemployment taxes do not apply.
To determine whether a worker is an independent contractor or employee, the IRS examines factors in three categories:
In certain cases where a taxpayer has a reasonable basis for treating an individual as a non-employee (such as a prior IRS ruling), non-employee treatment may be allowed regardless of the three-prong test.
If the proper classification is unclear, the business or the worker may obtain an official IRS determination by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
Generally, if a business has made payments of $600 or more to an independent contractor, it must file an information return (Form 1099-MISC) with the IRS and send a corresponding statement to the independent contractor.
Where the employer misclassifies the employee as an independent contractor, the IRS may impose penalties for failure to deduct and withhold the employee's income and/or FICA taxes. Penalties may be doubled if the employer also failed to file a Form 1099-MISC, though the lower penalty will apply if the failure was due to reasonable cause and not willful neglect.
Employers with misclassified workers may be able to correct their mistakes through the IRS's Voluntary Classification Settlement Program (VCSP). For employers that meet the program's eligibility requirements, the VCSP provides the following benefits:
Our tax advisor professionals can help you sort through the IRS rules and fulfill your tax reporting obligations. Contact us for more information.
*Internal Revenue Service. For 2020, the Social Security tax rate is 6.2% and is applied to earnings up to $137,700. The Medicare tax rate is 1.45% on the first $200,000 and 2.35% above $200,000.
There are different requirements for payroll and taxation in the United States, depending on the state and/or business activity. Federal and state...
Summary
As the 2020 calendar year-end approaches and much of the world continues to practice some form of sheltering in place, social distancing, and working...