Is it an employee or not?

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.