Do’s and don’ts for paying part-time employees

Do’s and don’ts for paying part-time employees

 Source:  The American Institute of Professional Bookkeepers; Bookkeeping Tips Newsletter

 

Do withhold FICA on part-timers, including retirees. 

Even if someone who works for you part-time also has a full-time job where they have had 100% of their FICA withheld for the year, you must withhold the full amount of FICA from their pay. These individuals can obtain a refund of any overpaid FICA on their 1040. Similarly, if a retiree receiving Social Security benefits works for you, say, one day a week, you must withhold FICA.

 

Don’t assume former employees who return part-time are Independent Contractors. 

If they do the same job they did before they left, especially in the same tax year, they are employees, not independent contractors.

 

Don't base worker status on length of service.  

A worker who fits the definition of “employee” is an employee and all employment taxes apply—even if he or she works for you only for a few hours on only one day, is still an employee.

 

Don't assume you must give benefits

To part-timers, or summer help or those hired for holidays. 

Nor are you required to include temps and part-timers in health, pension and other benefits. But to exclude them, have a written plan stating which benefits are not available to these workers.

 

Do define “part-time” v. “full-time” employees in your manual.  

For purposes of paying overtime under federal law, this distinction is determined by company policy, not federal law. Federal wage and hour law restricts only the number of hours worked in the workweek, when overtime must be paid (for each hour worked over 40 hours in the workweek) and the minimum overtime pay required, and the number of hours that children can work.

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IRS & States Team up to Find Independent Contractors

The IRS and the states know how tempting it is to classify workers as Independent Contractors because of saved employment taxes. 

That’s why Delaware and Wisconsin are targeting the construction industry with penalties of $1,000-$5,000 per violation. 

Other states such as Indiana and Nevada and Ohio are starting to share information on misclassified workers and similar violations. 

Expect your state to be watching you for misclassifying employees as Independent Contractors.

Determining a workers’s status depends on the facts that define both the entity and relationship of the entity to the worker at the time that the services are rendered. 

Here are the two categories of workers that the IRS and states are focusing on: 

Common Law Employee - Works for and performs services under the control of the entity that pays for the services.

Independent Contractor - An individual in business for him-/herself whose services are free of control from the entity paying for the services.

Employment taxes apply soley to employee wages.  These include FITW, employee and employer FICA, and FUTA. 

States may have SITW, SUI and disability. 

A business normally is not required to withhold from payments to Independent Contractors, but there are exceptions in some states.

Classification of Employees vs Independent Contractors

Classification depends on the degree of control exercised by the entity.  Evidence of control vs independence fall into 3 categories: behavioral control, financial control, and the relationship between the parties:

Behavioral Control: Facts that indicate whether the entity has the right to direct and control how the worker does the task for which the worker is paid including the type and degree thereof.

• Instructions given to an employee:  An employee is generally subject to the business' instructions about when, where, and how to work.   Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work is done.

•  Training given to the worker:  Although an employee may be trained to perform services in a particular way, Independent Contractors ordinarily use their own methods.

Financial Control: Indications of the entity’s right to control the business aspects of the worker’s job include: 

•  Unreimbursed Business Expenses:  Independent Contractors are more likely to have unreimbursed expenses than employees.

• The Worker's Investment:  An Independent Contractor often has a significant investment in the “facilities” used to perform services for someone else, but this is not mandatory.
• To What Extent the Worker' Services are Available to Other Entities:  Employees tend to work for a single business.
• How the Business Pays The Worker:  An employee generally is paid by the hour, week, or month. An Independent Contractor usually is paid by the job, although in professions, such as law, Independent Contractors are paid an hourly rate and are nevertheless still Independent Contractors.
• The Extent in Which the Worker Can Realize a Profit or Incur a Loss:  An Independent Contractor can make a profit or have a loss.

Type of Relationship: Facts that reveal the type of relationship between the entity and worker include:

• Written contracts describing the type of relationship the parties intend to create.
• Whether the entity offers the worker employee-type benefits-e.g., insurance, a pension plan, vacation pay, sick pay.
• Permanency of the relationship. Expecting a worker to stay with you indefinitely rather than for a specific project or period is generally evdidence of an employer-employee relationship.
• The extent to which the services performed by the worker are a key aspect of the entity’s regular business. If a worker’s services are a key aspect of the entity’s business activity, it is more likely that the entity has the right to direct and control those services, indicating an employer-employee relationship.

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For official IRS guidance, use Pub. 15-A. For related publications that give additional details, go to www.irs.gov and in the search box, type “employee vs. IC.” If you still don’t know if a worker is an employee, file Form SS-8 with the IRS to get a determination.

Getting Ready for End of Year - W-2 & 1099

Hi, I'm Jayne Miller, the QuickBooks Gal.

Welcome to another in our series of “Quicklets” – informational podcasts about QuickBooks and related bookkeeping topics. You can listen to our archived podcasts at blog.quickbooksgal.com. If you are a Peachtree user, be sure to check out our new PeachPod series at peachpods.custmbiz.com.

Last year I published a podcast about W-2's and 1099's that I think is worth repeating. It's getting to be that time of year and we need to be thinking about some of the things we have to do to get ready. As a business owner with employees or subcontractors you will be required to issue W-2's to employees and 1099-Misc to non-incorporated, non-employee service providers.

Subcontractors and service providers who are not incorporated must provide a form W-9 to you. You'll use this information to issue a 1099 to them if they were paid $600 or more in the tax year. You can download form W-9 at IRS.GOV. I generally mail this form to all subcontractors with their first payment. If you haven't done this yet, then it would be a good idea to mail or fax these out now so you will be prepared to process forms next month.

Form W-2 for Nevada employers is a 4-part document. You will issue 2 copies to the employee, keep one file copy with your payroll records and submit one copy along with transmittal form W-3 to the Social Security Administration.

Form 1099 in Nevada is a 3-part document. One copy remains with your payroll or vendor records, one is mailed to recipient, and one copy along with a transmittal form 1096 is mailed to the IRS. Employee and vendor copies must be distributed or postmarked no later than 1.31.08 and federal transmittals are due no later than 2.28.08.

In Nevada, we don't have personal income tax, so be sure to become familiar with your state's filing requirements now to assure that you are compliant.

Here's a simple checklist I use each Fall to get ready:

1 - Verify current employee information -create a simple form that you can attach to the next paycheck for each employee requesting their name, current address, social security number. I also include a line for their signature and the date they complete the form.

2 - Download Form W-9 - you can fill out this form online, then print multiple copies for distribution to any vendors who will receive a 1099 form. Independent contractors and other non-incorporated vendors who received $600 or require issuance of a 1009. I like to get these mailed or faxed no later than November 15th. I create a check-list of all that I submit and then attach returned forms to the list. You can download this form at www.irs.gov.

3 - Order forms now - order W-2's, 1099's and corresponding envelopes now. You can go to my website for special money saving offers. If you issue W-2's or 1099's for multiple companies, you may want to contact the IRS to order extra W-3 transmittal and 1096 transmittal forms. Additionally, if you issue 1099 Interest forms, you may want to order those directly from the IRS. Go to the IRS website for more information. Office supply stores will not, however, offer W-3 transmittals or 1096 transmittals separate from kits or bundles. When you purchase a package of 50 W-2's or 1099's, the manufacturer includes 1 or 2 transmittals. I like to order extra transmittals directly from the IRS at 800-829-FORMS; they're free. By the way, you can order any tax related form from the IRS, but remember, they are not computer friendly! Pay for the forms; order the transmittals only from the IRS.

4 - Make sure your tax tables are up to date - If you are using QuickBooks, be sure your subscription is up to date and that you are downloading updates when prompted. Peachtree users - make sure you order the tax tables for 2008 soon to assure that you are ready for end of year processing.

Don't forget...the W-2 forms for 2007 have been redesigned....you will not be able to use old forms! Order compliant forms soon to avoid last minute stress!

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I hope you find this discussion useful. If you have questions about this topic, just drop me a line at jayne@quickbooksgal.com. If you are a Peachtree user, check out peachpods.custmbiz.com.

Don’t forget that we are now serving Incline Village and Lake Tahoe. We have two great consultants in the area that will be happy to assist with QuickBooks or Peachtree training & support. Visit our website at tahoe.custmbiz.com. QuickBooks newest Point of Sale is great! If you are using POS and need assistance, call us!

Well, that’s it for now. I appreciate your time and hope you will join me again next time for another in our Quicklet series. If there are topics you would like me to cover or have questions, send your email to jayne@quickbooksgal.com.

I’m Jayne Miller, The QuickbooksGal. Thanks for listening.

Jayne Miller, is the owner of Custom Business Solutions, is a consulting firm in Reno, NV that specializes in providing bookkeeping and software support.