Hans Kasper, MS-CPA, PS

Hiring Employees
 

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Employees

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20-point checklist established by the IRS

IRS Independent Contractor Publication             PDF File

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Hiring Minors

Hiring Employees When You Start a New Business

Hiring Employees When You are Already In Business

Well, you’ve been in business for awhile and are finding that you can’t handle it all by yourself anymore.  You’ve decided that you need a bookkeeper to help you with the details you have no time for and a sales person to help with the volume of new business pouring in the door. Great!  Aside from finding the right person to work for you, there are a lot of other things to know in order to do this right. 

The IRSand the state both want to know about your employees, who they are, how much they make, and where they live.  So, you think ‘…maybe for awhile I’ll just hire someone to work with me but not as an employee…I’ll call the worker a subcontractor, or casual laborer, and then I won’t have to worry about withholding taxes and keeping track of paperwork!’

Here’s what the IRS says about your decision.  If you can control what will be done and how it will be done, even when you give them freedom of action, the workers are considered employees.  If the employer controls how the work results are achieved, the person doing the work is considered an employee. The greater the control exercised over the terms and conditions of employment, the greater the chance that the person working for you is your employee. Generally, people in business for themselves are not employees.  For example, doctors, lawyers, veterinarians, construction contractors and others in an independent trade in which they offer their services to the public are usually not employees.

An independent contractor usually works with a number of clients.  That person’s role is to accomplish a final result and to determine the best way to achieve that result. The IC pays his/her own taxes and files the required government forms.  The ICwill obtain a city license, business license, and a “d.b.a” (“…Doing business as”).  All taxes and benefits must be paid and obtained by the independent contractor.

The IRS has very strict rules about treating someone as a contractor instead of an employee, and you may need to determine that with the help of an accountant or attorney in order to avoid tax penalties. Following is a 20-point checklist established by the IRS to determine whether a worker is an employee.  It’s only a guideline – each situation will need to be reviewed.

  1. Does your company tell the individual when, where, and how work is to be done?

  2. Does the individual receive training from your company?

  3. Does the success or continuation of your business somewhat depend on the type of service provided by the individual?

  4. Must the individual personally perform the contracted services?

  5. Have you hired, supervised, or paid individuals to assist the worker in completing the project stated in the contract?

  6. Is there a continuing relationship between your company and the individual?

  7. Is the individual required to work set hours?

  8. Is the individual required to work full time at your company?

  9. Is the work performed on company premises?

  10. Is the individual required to follow a set sequence or routine in the performance of his work?

  11. Must the individual give you reports regarding his/her work?

  12. Is the individual paid by the hour, week, or month?

  13. Do you reimburse the individual for business/travel expenses?

  14. Do you supply the individual with needed tools or materials?

  15. Have you made a significant investment in facilities used by the individual to perform services?

  16. Does the individual suffer a loss or realize a profit based on his work?

  17. Does the individual only perform services for your company?

  18. Does the individual limit the availability of his services to the general public?

  19. Do you have the right to discharge the individual?

  20. May the individual terminate his services at any time?

Generally, “no” answers to questions 1-16 and “yes” answers to questions 17-20 indicate an IC.  Again however, this is a general guideline and some questions may not apply.  These must be taken on a case by case basis.

If you plan to hire an IC, there are a couple of things you can do to ensure that the government agencies never reclassify the IC as an employee.  First, you should have the IC fill out a questionnaire that you have designed.  It should include the following:

  1. Does the IC have a fictitious business name (d.b.a.)?

  2. How is the IC’s business structured (sole proprietorship, partnership, etc.)?

  3. What is the IC’s business address and phone number?

  4. How many people does the IC employ, if any?

  5. Does the IC hold any professional licenses?

  6. Does the IC hold any business licenses?

  7. How does the IC market his/her business?

  8. What insurance does the IC carry?

  9. Does the IC have his own business cards, professional stationery, etc.?

Secondly, make copies of any business or professional licenses held by the IC.  In addition, copies of certificates of insurance, a copy of the IC’s business card, advertising (if any), and as much other information as is available and the IC is willing to provide.  But don’t have the IC fill out an employment application.

The IRS does not take kindly to lost revenue in the form of employer matching social security, state and federal unemployment insurance premiums, state disability insurance premiums, etc. The penalties can be stiff if they determine that the person working for you as an independent contractor should have been considered an employee.

 Once you have decided that you need an employee, you might consider a family member.  If your business is a sole proprietorship or a partnership in which each partner is a parent of the child, you can hire your child under age 18 and not be subject to social security and Medicare taxes.  Nor are they subject to FUTA(Federal Unemployment tax).  If you decide to hire your spouse, his or her services are subject to income tax withholding, and social security and Medicare, but not to FUTA taxes.

Use caution during the interview of any prospective employees.  The federal government and many states have laws and regulations governing the types of questions that may be asked.  Only questions that reasonably relate to the job can be asked.  Questions that are off limits include the following:

  • Age, date of birth, etc.

  • Marital status, children, etc.

  • Sex, race, creed, color, religion, national origin, sexual orientation.

  • Disabilities.

  • History of hospitalization.

Once the decision to hire an employee has been made, and the person has been hired, he/she will fill out a W-4.  A sample of this form is on the next page.  This tells you how much the employee wants withheld from his/her paycheck at the end of each pay period for federal taxes.  The worksheet attached to the W-4 helps to determine the amount.  However, it isn’t necessary for the employee to fill out the worksheet; it’s just an additional tool to aid in figuring withholding amounts.

 You will keep the W-4 on file for reference.  It’s your authorization as an employer to withhold taxes from the employee’s paycheck.  If an employee requests (1) more than 10 withholding allowances or (2) exemption from withholding and his/her wages would normally be more than $200 per week, send a copy of the W-4 to the IRS with the 941each quarter. A Form W-4 remains in effect until an employee gives you a new one.  

Depending on the number of employees on your payroll, you will be required to pay payroll taxes monthly or semi-weekly.  In general, you will make your tax payments by taking a check to an authorized financial institution, such as your bank (savings and loans do not accept tax deposits).  In most cases, you will deposit these taxes monthly.  If your payroll tax liability for the quarter is less than $2,500, you can make the payment directly to the IRS at the end of the quarter when you file your 941.

 Publication 15, Circular E, Employer’s Tax Guide contains general information and employer rules concerning the hiring of employees, as well as tax tables to figure withholding, 941 form filing, and other information.

Your deposit will be made with a Form 8109, Federal Tax Deposit Coupon, which you should have received after filing your SS-4 application with the IRS. Some banks have a program where you can call in the information and they will deduct the amount from your bank account.  However, you will need to call your bank and get the paperwork to set that up. Otherwise, you will fill in the coupon and take it with a check made payable to your bank.  They will give you a receipt showing that the deposit was made.

At the end of each quarter, the IRS will send you a tax form called a 941. The 941 form is the way you report your employees’ withholding amounts, social security, Medicare and any deposits you’ve made to the IRS.  Each time you pay your employees, you withhold certain amounts for federal taxes based on the W-4 the employee filled out for you.  Depending on the amount of taxes due, you will be required to make a monthly, quarterly, or every third day deposit of those taxes.

The 941 reports the total payroll for the quarter, the amount of withheld federal taxes, the amount of FICAand Medicaretaxes withheld from the employees payroll, and the amount of matching funds from you as the employer.  You are required to match the amount of FICA and Medicare taxes that are withheld from your employees’ payroll.  FICA and Medicare taxes total 7.65% and you will match that amount, making a total of 15.3%.

This information is matched at year-end with the amounts reported to the Social Security Administration on your W-2’s and W-3’s. They compare the amounts of FICAand Medicarepaid in as indicated on your 941’s and the amounts reported on the W-2’s.  If these don’t agree, you’ll receive a letter asking for an explanation, and a correction, of the discrepancy.  It pays to be accurate!

In addition to the 941form that you will use to report withheld taxes to the IRS you will also report payroll information to the state.  Quarterly, you will receive a report from the Employment Security Department and from the Department of Labor and Industries.

Employment Security tracks the total payroll for unemployment purposes.  If you should have to lay off an employee, for example, that person may be eligible to collect unemployment monies from the state agency until he/she finds a new job. You have paid in funds on behalf of each of your employees for this purpose.  Employment Security assigns you a rate based on your history as an employer.  If you have a business where there is a large turnover (for example, a restaurant business), your rates may go up in the next year.

It is imperative when preparing this return that you input a number of hours worked by each employee during the last quarter; if you fail to do so, Employment Security will automatically assign you the highest rate possible. There is a wage cap for each employee after which you no longer have to pay taxes.  In 2001, it was $26,600 per employee.

In addition, corporate officers are not eligible for coverage in a for-profit organization, unless the company specifically elects to cover all of them.  There is a form available from the Employment SecurityDepartment for this election called a Voluntary Election Form (EMS 5203).  If the company does not want to offer this coverage, a letter must be sent to each officer to let them know that they are ineligible for unemployment benefits.  A copy of the letter with all names and signatures of each officer must be kept in the company files.

The Department of Labor & Industries requires you to report all worker hours to them, so that if there is an injury on the job or a work-related illness, your employee will receive medical coverage.  In some cases, time lost will also be compensated to the employee as well.  The employer pays the majority of the L & I rate, but a small portion may be deducted from the employee’s paychecks as well.  It’s not mandatory to deduct anything from the employee, but many businesses do because it helps to reduce costs to the employer.

Some employers who try to classify their employees as independent contractors quickly discover when the employee becomes injured that their company is now subject to fines and penalties for failing to report these people as employees.  Therefore, it is important to make sure that independent contractors are truly not employees.

Also, in a for-profit organization, the officersdo not receive coverage, and must elect it.  If your company elects coverage, and yours is a for-profit corporation, you must include all officers. If you are a sole proprietor, a partner, or a limited liability partner, you can elect coverage for any or all owners. Following is a copy of the Application for Elective Coverage. 

Certain businesses are excluded from coverage automatically, and you must elect coverage by filing Form F213-112-000 (copy follows).  Some of the businesses include casual employment, musicians and entertainers, volunteer workers, newspaper carriers, and insurance agents.

In addition to all of the above taxes for employees, the IRShas an annual tax called a Federal Unemployment Tax Act(FUTA) to supplement the states’ unemployment systems.  Most employers are required to pay both a federal and state unemployment tax.  This tax is only for employers to pay, and is not to be deducted from employee’s wages.

Although this return is filed annually, you may have to deposit these taxes quarterly, depending on the amount you owe.  If your FUTAtax liabilityfor a quarter is $100 or less, you don’t have to deposit the tax.  Once you reach that mark, you must make a deposit.  The amount you owe on your 940 taxes is based on whether or not your officersare exempt from state unemployment taxes. 

Generally, FUTA tax is .008 of the first $7,000 of wages for employees covered by state unemployment.  For officersnot covered by state unemployment, the rate may be as high as .062 of the first $7,000 of wages.  Therefore, if the state unemployment rate for your business is low enough, your officers may want to be covered by state unemployment since the tax for FUTA and SUTAmay be as low or lower than just being covered by FUTA alone.


Hiring minors in the State of Washington

Please follow the instructions in the links below or you will be subject to SIGNIFICANT fines and penalties.  This includes your own children.

Department of Labor and Industries - Hiring a Teen

Department of Labor and Industries - School and Parent authorization form

 

Hiring Employees When You Start a New Business

First, you must file a State of Washington license application that includes your statement on the number of employees being hiring and the type of work they will be performing.  This application will assign the Labor and Industry classes (workmen’s compensation insurance for the State of Washington) and the Employment Security Employer Class (unemployment insurance).

State of Washington - Master Business Application Online

In addition, there are local licenses and other state licenses that are required.  The state has a very good site (below) where if you input the correct information, you will obtain all of the license applications you must make for all city, county, and state licenses.

Local and State of Washington Licensing Online Checklist

DSHS requires all employers to determine if the employee is under a child-support enforcement obligation.  Click the link below.

DSHS New Hire Reporting

The IRS requires that you obtain an Employer Identification Number (EIN).  Complete Form SS4 to do so.

IRS Form SS4 Online Application for an Employer Tax ID#

You should become familiar with the employee tax withholding requirements and tax deposit requirement to avoid SIGNIFICANT penalties.  You can do so by reading the tax guide below.

IRS – Employer’s Tax Guide

Record each new employee’s name and number from his or her social security card. Any employee without a social security card should apply for one.  I would match the actual SS card with the application—you never know when someone could be making up an SS number.

Ask each new employee to complete the Form W-4.

You must verify that each new employee is legally eligible to work in the United States. This will include completing the U.S. Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. You can get the form from USCIS or by calling 1-800-870-3676. Contact the USCIS at1-800-375-5283, or visit the USCIS website at www.uscis.gov  for further information.

About the I-9 Form                      Form I-9

Quarterly, you will have to file the following forms that will be sent to you in the mail or you can file them online.  They are due 04/30, 07/31, 10/31, and 01/31.

Form 941            Unemployment insurance               Labor and Industries

Annually, you will have to file the following forms that will be sent to you in the mail or you can file them online.

  • Form 940 Federal unemployment insurance due 01/31

  • Forms W-2 due to employees on 01/31

  • Forms W-2 with W-3 coversheet due to the Social Security Administration on 02/28


Hiring Employees When You are Already In Business

First, you must file an updated State of Washington license application to report that you are hiring employees.  This application will assign the Labor and Industry classes (workmen’s compensation insurance for the State of Washington) and the Employment Security Employer Class (unemployment insurance).

State of Washington - Master Business Application Online

DSHS requires all employers to determine if the employee is under a child-support enforcement obligation.  Click the link below.

DSHS New Hire Reporting

You should become familiar with the employee tax withholding requirements and tax deposit requirement to avoid SIGNIFICANT penalties.  You can do so by reading the tax guide below.  To obtain tax deposit coupons, call the IRS at 1-866-455-7438

IRS – Employer’s Tax Guide

Record each new employee’s name and number from his or her social security card. Any employee without a social security card should apply for one.  I would match the actual SS card with the application—you never know when someone could be making up an SS number.

Ask each new employee to complete the Form W-4.

You must verify that each new employee is legally eligible to work in the United States. This will include completing the U.S. Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. You can get the form from USCIS or by calling 1-800-870-3676. Contact the USCIS at1-800-375-5283, or visit the USCIS website at www.uscis.gov  for further information.

About the I-9 Form                      Form I-9

Your 941 and 940 tax returns will begin automatically coming to you in the mail once you file your first Form 941.  This can be done by clicking the link below, completing the form and mailing it to the IRS.

Quarterly, you will have to file the following forms that will be sent to you in the mail or you can file them online.  They are due 04/30, 07/31, 10/31, and 01/31.

Form 941            Unemployment insurance               Labor and Industries

Annually, you will have to file the following forms that will be sent to you in the mail or you can file them online.

  • Form 940 Federal unemployment insurance due 01/31

  • Forms W-2 due to employees on 01/31

  • Forms W-2 with W-3 coversheet due to the Social Security Administration on 02/28

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This page was last updated on 05/13/2010

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