To The Point
News from First Tier Accounting

August 2014
In This Issue
Employees vs Independent Contractors
QuickBooks Corner - Tracking Independent Contractors
This Month's Quote
No matter what people tell you, words and ideas can change the world. - Robin Williams
Fun Fact

Theodore "Teddy" Roosevelt delivered the famous "Speak Softly and Carry a Big Stick" speech at the Minnesota State Fair in 1901. Later known as the "Big Stick Policy", it was a foreign policy that advocated the use of caution and diplomacy, backed by the use of power if needed.

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First Tier Accounting is committed to helping small businesses maintain accurate and timely accounting records, understand their financial data and use this information to better manage business operations.
Greetings!

Hard to believe that it will soon be back-to-school time...hope you were able to enjoy the summer weather and spend quality time with family and friends!  

For this month's newsletter, I decided to re-run an article that I wrote a couple years ago regarding the distinction between an employee and an independent contractor.  I have had a lot of questions from clients lately in this area, so I thought it would be a good subject to revisit so everyone is up-to-speed on how to classify workers.

On a personal note, I wanted to share that my family is once again participating in the Twin Cities Walk to Defeat ALS in Sept. We are walking in memory of my brother, Steve, who lost his battle with ALS in June 2013.  If you are interested in donating to our team, you can visit my fundraising page.  Any and all donations are greatly appreciated!  If I reach my fundraising goal, I will also do the ice bucket challenge, so if you'd like to see me do something wild and crazy for a change, please help me get there!

Have a great month!

Tracey
Employees vs Independent Contractors - What's the big deal?
As a small business owner, you may hire people as independent contractors or as employees.  
How you classify these people affect a number of things, including how much you pay in taxes, whether you need to withhold taxes, and what documents you need to retain and to file.  The classification also affects the individuals eligibility for social security and Medicare benefits,
employer-provided benefits and income tax.  Improper classification can result in fines and penalties, along with back taxes assessed against the business.  So, as you can see, it is worth a little time and effort to determine what is the proper classification for the people you hire.

The IRS uses three main criteria to determine the relationship between businesses and workers: 
  1. Behavorial Control - how/when/where the work is to be done, what tools are required, who should assist, and where to purchase supplies and services. 
  2. Financial Control - who controls the financial aspects of the worker's job
  3. Type of Relationship - how the business owner and worker perceive their relationship 
Aspects of a typical employee are:
  • Receives extensive instructions and/or training on how the work is to be done
  • Required to work specific hours or a specific schedule as determined by the employer
  • Eligible to have business expenses reimbursed 
  • Eligible for company-provided benefits, such as insurance, pension, or paid leave
  • Employer must withhold income taxes and employee's share of Social Security and Medicare
  • Employer must pay their share of Social Security and Medicare, as well as federal and state unemployment taxes
  • Employer must provide a W-2 to employee by Jan 31 of the following year
  • Forms W-4 and I-9 must be filled out by employee and kept on file at business office

Aspects of a typical independent contractor are: 


 

  • Does not receive extensive training or instruction on how work is to be done
  • Has a significant investment in their work, such as providing their own tools and equipment
  • Is not typically reimbursed for business expenses
  • Can realize a profit or loss from the work being performed
  • Is not eligible for employer-paid benefits
  • Has a written contract showing that an independent relationship is intended
  • May have a Form 1099 issued for the amount paid during the calendar year
  • Is responsible for paying their own income tax and self-employment tax  
  • Form W-9 must be filled out by contractor and kept on file at the business office      

 

Both employers and workers can ask the IRS to make a determination of a worker's status by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.  The form can be obtained on the IRS's web site - it also may be helpful for you to just review this form to see the types of questions the IRS uses to determine status.

 

For more information on Employee vs Independent Contractor, you can visit www.irs.gov and refer to Publications #15-A, #1779 and #1976.  Or you may call the IRS directly at 1.800.829.3676. 

 

QuickBooks Corner                                                                                             

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QuickBooks has some built-in features that allow you to easily track payments to independent contractors and to issue 1099s at the end of the year.  To set up an independent contractor in QuickBooks, perform the following steps:

  • In Vendor Center, click on New Vendor.  Enter the name, address and contact info for the independent contractor.  
  • On the Additional Info tab, fill in the Tax ID.  If the contractor should be issued a 1099, click on the box for "Vendor Eligible for 1099".  NOTE:  If you are unsure whether they must be issued a 1099, consult your tax accountant. 
In order to print the 1099 forms from QuickBooks, you will need to activate that option under Edit > Preferences > Tax: 1099.  

You can also set up Direct Deposit payments for 1099 vendors through QuickBooks.  

For assistance with setting this up or questions on printing your 1099 forms, please contact me at [email protected].