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Independent Contractor...or Payroll Employee
Hiring payroll employees is a BIG responsibility, requiring extra paperwork, costs and complying with labor laws.
Employees should be seen as a valuable asset to your company and in return you should be able to take care of them.
You pay a “company share” (or half) of their Social Security and Medicare taxes, which is 7.65 percent of their gross pay; and Unemployment Insurance, which is at an experience rating, anywhere between 0 percent and 7 percent of their gross pay. You withhold the employee’s share and pay it when due. You also pay Worker's Compensation Insurance and maybe other benefits.
Hiring an independent contractor is usually more expensive because they, or their firm, bear these responsibilities at their own expense.
You must request a Form W-9 from them if you pay more than $600 per year. Then at the end of the year, prepare Forms 1099 and 1096 to report what you paid them.
The IRS gives us three things to consider from Form SS-8:
You give instructions on how to do the work
You train the worker on how you want it done
You control the worker's time and activities
The worker comes fully trained and equipped to do the work
The worker is free to come and go as needed
The worker has their own business and brings services to yours
You set the rate of pay for the worker
You set the hours for the worker
You pay the taxes for the worker
The worker sets their own rate and pays their own taxes
The worker invests in their work (tools, insurance, knowledge)
The worker is not necessarily reimbursed for expenses
Relationship of the Parties:
You pay vacation, holidays, sick pay, etc.
You must pay unemployment on the worker
You may need the worker to be permanent
The worker is independent and can do work for other businesses
The relationship can be terminated by either party without incurring liability or penalty
The worker makes a contract with you for services provided
Connie Harvey is in her eleventh year in the business of helping other businesses do a better job of tending their books. She is a 2004 graduate from McCook Community College and is a QuickBooks ProAdvisor. She also serves on many financial boards.
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