Independent Contractor vs. Employee

The IRS has recently started an initiative to educate new small business owners on their federal tax responsibilities. One area in which new small businesses can get caught up is when advancing to the point where they need add additional “hands in the pot”. According to the IRS, “it is critical that you, the employer, correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.” (http://www.irs.gov/businesses/small/article/0,,id=99921,00.html)

Filing at 1099-MISC of Independent Contractors

According to IRS.gov, if you paid someone who is not your employee, such as a subcontractor/independent contractor, attorney or accountant $600 or more for services provided during the year, a Form 1099-MISC (PDF) needs to be completed, and a copy of 1099-MISC (PDF) must be provided to the independent contractor by January 31o f the year following payment. You must also send a copy of this form to the IRS by February 28.

Preparing and Filing Form W-2 for Employees

At the end of the year, the employer must complete Form W-2, Wage and Tax Statement (PDF). A copy of this form must be given to the employee by January 31st after the end of the year. You must also send a copy of the W-2 to the Social Security Administration (SSA) by February 28th (after the end of the year) unless you file it electronically -- then it is due on March 31st. Employers can prepare and file up to 20 W-2s at a time, free of charge, at the Social Security Administration’s Web site. Using SSA’s online W-2 filing, employers can also print out all the necessary copies of the W-2 for their employees, state taxing agencies, etc.

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