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QuickBooks Tip Employees vs Independent Contractors

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        <p>The days when a small business could ignore the risks of
having misclassified workers are over. Unfortunately, some employers
improperly classify their employees as independent contractors to avoid
the pain associated with having employees, namely:</p>
<ul><li>Payroll taxes</li>
<li>Minimum wage or overtime requirements</li>
<li>Other wage and hour law requirements, like providing meal periods and
rest breaks</li>
<li>Reimbursable business expenses employees incur in performing their
jobs </li>
</ul><p>Additionally, employers don't have to cover independent
contractors under workers' compensation insurance, and are not liable for
payments under unemployment insurance, disability insurance, or social
security.</p>
<p>It's true, the expenses associated with employees are high. However,
the cost of misclassifying workers is even higher. If your contractors
are determined to really be employees you will not only be required to
pay the taxes and fees you should've, you may also be required to pay the
employee's taxes as well. Not to mention the stiff penalties and
interest that can be imposed by both federal and state agencies for
violating the various laws.</p>
<p>This is no small matter and is on the radar of every government agency
out there, all of whom are anxious to find additional revenue sources
these days. The IRS estimates that one in seven U.S. employers is
guilty of misclassifying some of its employees, resulting in a loss of
more than $4.1 billion a year in tax revenues. These days the question
is no longer "if" you'll get audited for employee misclassification it's
"when".</p>
<p>For businesses facing an audit, the odds favor the IRS. A recent
report found that 92 percent of the companies audited for
"misclassification" were hit with significant penalties and assessed for
back taxes. Between 1988 and 1995, the IRS audited more than 13,000
businesses, reclassified 500,000 of their independent contractors as
employees, and levied $830 million in back taxes and penalties.</p>
<p>Making matters worse, sometimes the various agencies disagree. For
instance, here in California there are several state agencies involved
with the determination of independent contractor status:Â (1) the
Employment Development Department (EDD), which is concerned with
employment-related taxes, (2) the Division of Labor Standards Enforcement
(DLSE), which is concerned with whether the wage, hour and workers'
compensation insurance laws apply; (3) the Franchise Tax Board (FTB),
which is concerned with state income taxes; (4) the Division of Workers'
Compensation (DWC), which is concerend with worker's compensation; and
(5) sometimes even the Contractors State Licensing Board (CSLB), that
also have regulations or requirements concerning independent
contractors and it's not uncommon for one to rule that a worker is an
employee while another rules that the same worker is an independent
contractor.</p>
<p>Because the potential liabilities and penalties are so significant if
an individual is treated as an independent contractor and later found to
be an employee, each individual working relationship needs to be
thoroughly analyzed to make sure every single worker is properly
classified. Now is not the time to group classes of employees
together. Just because one of your workers qualifies as an independent
contractor, don't assume that all the others doing similar work will.</p>
<p>It all boils down to control - does your business have control or the
right to control the worker both as to the work done and the manner and
means in which it is performed? The IRS breaks control down into three
categories:Â behavioral control, financial control, and relationship of
the parties. It is very important to consider all the facts for every
single one of your worker relationships – no single fact provides the
answer.</p>
<p><strong>Behavioral Control </strong></p>
<p>These facts show whether there is a right to direct or control how the
worker does the work.</p>
<ul><li><strong>Instructions</strong> - if your business has the right to
direct or control the work, even if you don't actually exercise the
right, it can lead to an employee classification. Here are a few
examples of what's considered control: <ul><li>how, when, or where to do
the work </li>
<li>what tools or equipment to use </li>
<li>what assistants to hire to help with the work </li>
<li>where to purchase supplies and services </li>
</ul></li>
<li><strong>Training</strong> - if your business provides training about
required procedures and methods it may be considered an indication that
the business wants the work done in a certain way, which can lead to an
employee classification </li>
</ul><p><strong>Financial Control</strong></p>
<p>These facts show whether there is a right to direct or control the
business part of the work. Here are a few questions to ask yourself:</p>
<ul><li>Does the worker has unreimbursed business expenses? </li>
<li>Did the worker invest in the facilities used in performing services?
</li>
<li>Does the worker makes his or her services available to the other
businesses? </li>
<li>How do you pay the worker?</li>
<li>Can the worker can realize a profit or incur a loss? </li>
</ul><p><strong>Type of Relationship </strong></p>
<p>These facts show how the business and the worker perceive their
relationship.</p>
<ul><li>Do you have written contracts describing the relationship the
parties intended to create? </li>
<li>Is the worker available to perform services for other, similar
businesses?</li>
<li>Do you provide the worker with employee–type benefits, such as
insurance, a pension plan, vacation pay, or sick pay?</li>
<li>How permanent is the relationship?</li>
<li>Are the services performed by the worker a key aspect of your
business? </li>
</ul><p>You'd think that a written contract detailing that you and your
worker agree that you are not creating an employer-employee relationship
is all that's needed, but unfortunately this isn't the case. It may
certainly help, especially is you subsequently issue a 1099 form instead
of a W-2 form, but even this doesn't guarantee protection.</p>
<ul><li>If you decide to classify some or all of your workers as
employees, this is what you have to look forward to: </li>
<li>You must withhold income tax and your employee's portion of social
security and Medicare taxes. </li>
<li>You are also responsible for paying social security, Medicare, and
unemployment (FUTA) taxes on your employees' wages.</li>
<li>You must file a Form W-2, Wage and Tax Statement, showing the amount
of taxes withheld from your employees' pay. The Form W-2 is used by
employers to: <ul><li>Report wages, tips and other compensation paid to
an employee </li>
<li>To report the employee's income tax and Social Security taxes
withheld and any advanced earned income credit payments </li>
<li>To report wage information to the employee, the Internal Revenue
Service and the Social Security Administration </li>
</ul></li>
</ul><p>QuickBooks handles W-2's differently based on which payroll
subscription you've chosen. There are three options available:</p>
<ul><li><strong>Basic Payroll</strong>:Â No tax forms, only reports that
your accountant can use to prepare them </li>
<li><strong>Enhanced Payroll</strong>: Includes all federal and many
state tax forms, you pay taxes and file forms </li>
<li><strong>Assisted Payroll</strong>: Intuit handles your payroll taxes
for you</li>
</ul><p>If you decide to classify some or all of your workers as
independent contractors, there isn't as much paperwork but there are some
reporting requirements:</p>
<ul><li>You may be required to file Form 1099-MISC, Miscellaneous Income,
to report what you have paid to your independent contractors. The Form
1099-MISC is: <ul><li>Used to report payments made in the course of a
trade or business to another person or business who is not an
employee</li>
<li>Required among other things, when payments of $10 or more in gross
royalties or $600 or more in rents or compensation are paid</li>
<li>Provided by the payer to the IRS and the person or business that
received the payment. </li>
</ul></li>
<li>You do not have to withhold taxes from your independent contractors'
pay. They are responsible for paying their own income tax and self-
employment tax. </li>
</ul><p>If setup properly, QuickBooks can help you track all the
information needed for 1099's. Here's how:</p>
<ul><li>Turn on 1099 preference <ul><li>Edit &gt; Preferences &gt; Tax:
1099 &gt; Company Preferences tab, check box next to Do you file 1099-
Misc forms and select accounts you use to pay subcontractors next to Box
7</li>
</ul></li>
<li>Setup subcontractors as 1099 vendors <ul><li>Double-click on vendor,
select Additional Info tab, check box next to Vendor eligible for 1099
</li>
</ul></li>
<li>Manage reporting process <ul><li>Vendors &gt; Print 1099's/1096 </li>
</ul></li>
</ul><p>In the end, how to classify your workers is a business decision
that only you can make. You may save money upfront by classifying them
as independent contractors, but you could end up paying much more in the
long run if they are reclassified. Protect yourself as much as possible
with a paper trail - contracts, agreements, written answers to the
questions listed above. You might even consider requiring your
independent contractors to prove you with documentation that they are
actually operating a small business themselves, such as a business
license, Doing Business As (DBA) or Tax ID number from the IRS.</p>
<p>If you need additional assistance, please call our QuickBooks
technical support line at 888-351-5285. We are here to help you get the
most out of QuickBooks!</p>        <!--INFOLINKS_OFF-->
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