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Employee vs. Independent Contractor

Posted by Admin Posted on Oct 16 2014
     Is the person performing services for your company an employee or an independent contractor?  This is one of the most important questions facing many businesses when paying someone for services provided.  On the surface it may seem easy to answer but a lot of times that's not the case.  It's important to make the correct determination due to how payments to that person are treated.
     Generally, you must withhold income taxes, Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee.  Conversely, no taxes have to be withheld from payments made to an independent contractor.  With this in mind, it's easy to see which method is beneficial to employers and why the IRS is very interested in making sure businesses make the correct decision.

     When trying to determine whether the person providing the service is an employee or independent contractor, all information that provides evidence of the degree of control and independence must be considered.  The facts that provide evidence fall into three categories:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial:  Are the business aspects of the worker's job controlled by the payer? Business aspects would include things like how the worker is paid, whether expenses are reimbursed, who provides tools or supplies?
  3. Type of Relationship:  Are there written contracts or employee type benefits (pension plan, insurance, vacation pay)? Will the relationship continue and is the work performed a key aspect of the business?

     Businesses must weigh all factors when making a determination.  Some factors may point towards an employee while others say independent contractor.  There is no magic number or formula of factors that makes the worker an employee or independent contractor.  The business has to look at the "big picture" and determine to what extent is their right to direct and control the worker. 

     If, after reviewing all factors, the business cannot make a determination the IRS is here to help! Form SS-8, Determination of Worker Status for Purpose of Federal Employment Taxes and Income Tax Withholding can be filed with the IRS.  The form may filed by the business or the worker.  The IRS will review the facts of the scenario and make an official determination.  

New Employee Paperwork

Posted by Admin Posted on May 12 2014

     Hiring a new employee can be a daunting task for an employer.  The open position has to be posted and advertised, candidates have to interviewed and properly vetted, and once the position is filled the mounds of paperwork start to stack up.  Hopefully, this post will clear up some of the paperwork issues that arise in the process of hiring employees.  With regard to payroll, there are four main forms that all (Ohio) new hires should fill out immediately after accepting the position.  They are:

  1. Federal Form W-4
  2. Ohio IT-4
  3. Ohio New Hire Form
  4. USCIS Form I-9
     Let's take a closer look at each form, beginning with the Federal Form W-4.  The purpose of the W-4 is to make sure the correct amount of federal tax is withheld from the employee's earnings.  If the employee does not return a completed W-4 before their first payroll is processed you must withhold federal taxes at the single, 0 allowances amount. It is advised by the IRS for the employee to consider filling out a new W-4 every year and when personal or financial situations change.  The directions are pretty straight forward on how to figure the number of allowances to claim.  A common mistake made by employees is claiming exemption on line 7 and also filling out lines 5 or 6.  If an employee claims exemption on line 7 then the only other lines that should be filled out are lines 1-4.  Lines 5 and 6 should left blank. 
     The next form the employee will need to fill out is the Ohio IT-4.  The IT-4 ensures the correct amount of Ohio state tax is withheld much like the W-4 does for federal taxes.  The directions for filling out the IT-4 are relatively simple, one item of note is the employee must list his/her public school district of residence.  If this is left blank it is strongly urged that the employer visit and use The Finder to determine if there is an applicable school district tax to withhold. 

     The third form is the Ohio New Hire form.  This form is becoming antiquated with each passing year due to the number of employers reporting new hires electronically.  We offer electronic reporting of new hires to our clients free of charge.  Although electronic reporting eliminates the need to complete this form, it is still recommended due to the date of birth field.  This is the only place employers capture this data for newly hired employees.  (Unless it is listed on the employer's custom employment application form.)

     The last form discussed is the USCIS I-9.  The purpose of the I-9 is to document verification of the identity and employment authorization of each employee.  There are three sections that make up the I-9:  Employee Information and Attestation, Employer Review and Verification, and Reverification and Rehires.  We'll briefly discuss each section below and highlight the main points but it is strongly recommended to read the detailed instructions for this form before completing it.
     The first section is for the employee to complete.  Along with basic personal information (name, address, DOB, etc.), this section requests the new hire's work status.  The four options are a citizen of the U.S., a noncitizen national of the U.S., a lawful permanent resident, or an alien authorized to work.  Please note if the new hire selects either of the last two options additional information is required.  A lawful permanent resident requires an Alien Registration Number (A-Number) or a USCIS Number.  An alien authorized to work requires in all but a few exceptions the date their employment authorization expires and their A-Number/USCIS Number.  If no A-Number/USCIS Number has been received, the new hire can record the Admission Number from form I-94. 
     The second section is for the employer to complete  The employer must have section 2 completed within three business days of the employee's first day of employment.  Page 9 of the I-9 lists the acceptable documents the employee can present to prove employment eligibility.  They must provide one document from List A - or - one document from List B and one document from List C.  Employers cannot specify which document(s) employees present.  The instructions on how to examine and record each document can be found in the pages preceding the I-9 form.  Please review them before completing the form. 
     Section 3 is reserved for occasions of rehiring an employee within three years of the date the Form I-9 was originally completed.  Employers have the option of completing a new Form I-9 or completing section 3. 

     Hopefully, this brief summary clears up some of the confusion of new hire paperwork with regard to payroll.  All of the mentioned forms can be found on the "Employee Forms" page of our website.