AUGUST 12TH, 2009
By CPA SAM
Q. I’m a new employer and have started withholding taxes from my workers checks. Where do I put the money?
A. Definitely don’t put it under your mattress! Publication 15 from the IRS is what I like to call the Employer’s Tax Bible. Every employer whether new or seasoned should look through that document each year. Within its pages, you will see a schedule of how often you must remit the taxes you withhold from employee checks to the IRS. The section that relates to your question is chapter 11 “Depositing Taxes”. The frequency depends on the total amount of tax liability you report. Certain employers can remit their totals with their quarterly 941. Certain employers must make a deposit monthly. Still others get semi-weekly treatment. The largest employers have a next-day obligation for deposits. You can make your deposits using the EFTPS system, or take a paper coupon and check to the bank. If you are using a payroll service, they can likely handle the deposits for you.
All money withheld from employee checks must remain in trust once it comes out. The employee is relying on you to put their tax payments into an account and pay it for them. Then, once per year when they file their taxes, those payments will count toward their tax liability. Many employers recently have been convicted of not paying these taxes and instead running with them or spending them on business or personal expenses. You don’t what to join that crowd. Here is a link of some of the cases where employers didn’t pay over the money they withheld.
JULY 29TH, 2009
By CPA SAM
Q. Dear Mr. Kerch,
I have read your blog with interest. I will soon start a new business. I will sell advertising to small service-oriented businesses. I expect to recruit agents to sell this service at the local level in small communities. I do not wish to be classified as an employer and thus want to structure the business and my relationship with these local agents in a manner consistent with this goal. I have read the IRS publication employee vs. sub-contractor (19, I think) a few times. It has succeeded in convincing me that there are a myriad of ways in which to fail in my goal. How do I best find and screen the right professional to help me not only set up this enterprise but also review my internal systems of fee collection, commission payment, the provision of agent network working tools, and management of agent network so as not to trigger an IRS determination of employer status? Also, I will need a salesforce software tool (salesforce.com?) and also software for paying commissions.
Ideas?
A. The document used in determining the type of relationship is actually form SS-8. In my opinion, the key factor in determining whether the relationship is employee/employer or between contractors is the level of control.
- Are you going to direct the methods used by the reps?
- Will you supply sales leads?
- Will you supply materials and/or training?
- Will you dictate schedules?
- Are the agents allowed to sell other products besides yours to clients they visit?
- Do your reps bid on an area?
- Do you bill the clients and pay the reps based on collections or do they collect and remit to you?
Unfortunately, the main goal of most companies when this question arises is the avoidance of both employment taxes and workers compensation insurance. Essentially, if you don’t have employees, you don’t pay unemployment tax. But, if one of these agents files a claim for unemployment if the relationship does not work out, and it is determined that you were actually an employer, heavy fines will be the result. In fact, the same result will occur if the IRS determines you were actually an employer and did not pay any employment taxes for these individuals.
There is no fee for completing form SS-8 and filing it with the IRS. Because this is a big audit area and probably a big contributor to the tax gap (estimated unpaid taxes), the IRS is probably going to consider your agents to be employees 99% of the time.
The questions you ask regarding structure are good questions and probably best answered by finding an industry group that closely aligns with your desired business. Some examples are the NFIB and the NASP. Certains CPAs and business consultants who specialize in your industry can help you with specifics about the type of software that is best for CRM (customer relationship management) and payments to your agents. Good luck with the new business. Make sure you have a competent tax adviser around to help you take advantage of all the legal ways to reduce your taxes. You don’t want to miss any deductions that are due to you.
APRIL 1ST, 2009
By CPA SAM
Q. I own a small business and have 5 employees. I am looking to expand to company and need to offer some kind of retirement plan for my employees. 401(k) plans are really expensive and I don’t know much about SIMPLE plans. What do I choose?
A. This is a very important question for small business owners to think about. When you are ready to start offering benefits to your employees, some types are better suited for larger employers and some are specifically designed for smaller employers. The biggest difference between these types of plans is the testing requirement. In traditional 401(k) plans, employers need to ensure that the plans do not become “top heavy”. That is, key or highly compensated employees are taking advantage of the plan more than regular employees. If a 401(k) plan becomes top heavy, the plan risks losing it’s tax benefits. In a smaller business, an employer may wish to take full advantage of the retirement contributions on behalf of him or herself while employees may not want to or be able to. By removing the testing requirement, you are providing the plan without the risks.
Limits on the SIMPLE plans are a bit lower ($11,500-Simple vs $16,500-traditional for 2009). There are also limits to the amount that an employer can contribute to an employee’s account (3% of employee compensation-Simple vs 25%-traditional). If your employee population reaches 100, that employer is no longer eligible for the SIMPLE type plans.
It is a great idea to offer a retirement savings plan to your employees. As an employer, you can choose to match or not match the contributions which makes the plan that much more valuable. It is a great way to attract and retain the best talent.
FEBRUARY 25TH, 2009
By CPA SAM
Q. I am thinking of hiring someone and would like to know if there is any benefit to me if I pay the employee’s taxes. For example is my payment of the employees local and/or federal taxes am I allowed to deduct any of these on my own tax returns. I would also like to know how to accomplish this payment of taxes for the employee and how it affects their net pay.
A. Your question sends shivers down the spine of auditors and CPAs everywhere. It is not the decision of the employer whether or not they can decide to withhold taxes calling the person an employee. If you have an employer/employee relationship, you must withhold taxes following the guidelines in Publication 15. If you are a sole proprietor, all expenses you incur in the hiring of employees are deductible on your schedule C along with your other business expenses. Consider the following example:
employee is paid weekly $10 per hour and works 30 hours per week. Employee is single with 1 withholding allowance.
Gross pay = $300.00
Social Sec = $ 18.60
Medicare = $ 4.35
Fed tax = $ 20.00 (per publication 15)
Net Pay = $257.05
You as the employer are required to match the Social Security and Medicare tax. You are also required to pay Federal and state unemployment tax. All of this is explained in Publication 15. I would suggest you retain the services of a payroll company or a CPA to help you get the payroll process under control for awhile. Once you learn all the ins and outs of reporting and paying the liabilities, you may wish to bring the process back in house. Payroll is simply too complicated and too expensive if you don’t know what you are doing. The penalties and interest charged by the IRS for even the smallest mistake can add up quickly.
SEPTEMBER 24TH, 2008
By CPA SAM
Q. I received a bonus check and the amount that was on the paystub was $500 less than what the bonus came out to. When asking the owner he stated that money was used to pay for the employer’s share of the taxes. On top of that, they took out taxes for my portion as well. On the paystub, it does not show the taxes that were taken out. Did I get cheated?
A. The short answer is Read more »
SEPTEMBER 3RD, 2008
By CPA SAM
Q. I am currently applying for a loan and need copies of my paystubs. Where can I get those? I checked online but can’t find them.
A. When I did support for PaycheckCity.com, I can’t tell you how many times I was asked that question. Everything from:
- How do I get my paystubs to
- What does my W-4 say to
- I lost my W-2. Can you get me a new copy?
was asked to the Read more »
AUGUST 6TH, 2008
By CPA SAM
Q. I have been a sole proprietor and now hired a new employee. She will be working from home in California. The question is about State withholding. My company does business currently in Maryland. What do I do with California withholding, Unemployment etc. Somebody said I should not withhold state tax for her and have her send estimated payments to the state. Do you recommend that?
A. Both employers and employees get confused with the concept of withholding at the Read more »
MAY 21ST, 2008
By CPA SAM
Q. I am a painter and my boss says I am an independent contractor. He says I have to pay all my own taxes and my paycheck will be my total wages instead of minus taxes. Is that correct?
A. Unfortunately, I can’t make the distinction of whether or not you are actually an employee. I can tell you that in my experience many workers in the service industry like painters, plumbers and other laborers are incorrectly classified. The issue is the level of control exerted over your work. For a definitive answer, you can complete form SS-8 and send it to the IRS for review. I wrote an article about this topic that you can read here. For purposes of this blog, I will describe the effect of both scenarios from a tax perspective.
If you are truly an employee, then the employer matches what you contribute to Social Security and Medicare. Depending on your state, you could be eligible for health benefits. Your employer will also pay FUTA and SUTA (state and federal unemployment). Your state also requires that enmployers maintain some sort of workers compensation coverage in case you are injured on the job. As an employee, you get a certain level of protection again lay offs and on-the-job injury that the employer must pay for. You can see why certain companies try to skirt these requirements. They are expensive.
As an independent contractor, you are liable for self-employment taxes and have no work comp or unemployment insurance coverage in most cases. This means, the “employer” saves a ton of money. He also moves the risk off his own business and sticks it to the contractor. This also means that you the contractor must file quarterly estimated tax payments with the IRS or risk large penalty and interest payments. You are liable for all taxes.
In a mis-classified situation where you are actually an employee but considered a contractor by your “employer”, it is very likely that the “employer” is not paying tax on his/her income either. The IRS has identified this as a significant source of the so-called “tax gap” and is looking closely at ways to find and audit organizations in these industries.
Good luck on your quest. Ignorance is often the cause of misclassification. However, more often than not, it is an outright attempt to hide from the government in my opinion.
MARCH 24TH, 2008
By CPA SAM
Q. What’s the difference between a W-2 and a W-4?
A. Through my tenure on the IRS IRPAC advisory group, I have learned one great rule, there are thousands of abbreviations and acronyms thrown around the government. Just in payroll there are so many of them that is hard for someone who works in that field to keep them straight, let alone those who are regular employees. You have the W-2, the W-4, the 1099, the I-9, 941, 940, 94X, 2678 and the list goes on. As time goes on, I hope to decode what some of these forms are used for in the payroll world. This is the first issue in that (probably very long-running) series.
Employers use the W-2 to report annual wages paid to their employees. If you have more than one job, you will receive one W-2 per employer. The numbers in those boxes are used by your tax preparer to determine your tax liability. If you are in the company 401(k) or pre-tax medical plan, the gross wage boxes will likely be different. This is ok.
Employees use the Form W-4 to report allowances and filing status to their employer. The numbers you submit will be used by your employer to determine your withholding amounts for Federal income tax only. Social Security and Medicare are calculated as flat percentages and are not affected by your filing status. The Form W-4 is your best tax planning tool. If you work with your CPA or tax adviser on completing this form correctly, you can minimize extra tax due and minimize the refund you receive at the end of the year. Whenever a major life change occurs, make sure you adjust your W-4 values accordingly as quickly as possible.
While they both start with W’s, they have distinctly different uses. Using the correct terminology will make your communication with the payroll department much more efficient and less confusing.
MARCH 11TH, 2008
By CPA SAM
Q. Where do I send FICA, Medicare, taxes?
A. If you are an employer, FICA, Medicare and Federal withholding taxes should be deposited according to the schedule assigned by the IRS to your company. Very small employers can deposit and report these withholding amounts on Form 944 annually. The other deposit requirements are Monthly, Semi-weekly and Daily depending on the amount of the deposit. All of this is discussed in Publication 15 in section 11, “Depositing Taxes.”
To answer your question, you can Read more »
