It is essential that a business understands when a worker is an employee and when a worker is an independent contractor. There are certain payment and filing requirements imposed by the IRS no matter how the worker is classified. This article provides a high-level summary of some of the federal requirements that businesses need to be aware of when paying their workers.
Who is an Employee?
If your business has workers providing services on its behalf, unless the worker has their own business or they offer same or similar services to other businesses, it is likely that the worker is an employee. The substance of the actual relationship between you and the worker determines their classification, it is not a choice to be determined by the worker or the business. If the worker is an employee, the business is responsible for withholding various taxes. At the federal level, this includes income, social security, and Medicare taxes on the wages paid to the worker.
Often businesses are confused when it comes to classifying their workers. Businesses sometimes consider the wrong factors or circumstances when determining how to classify the worker. The following are common mistake examples of factors or circumstances that should NOT be considered when determining the worker’s classification:
- How often the worker performs services whether it is full time, part time, or seasonal;
- The workers preference to be classified as an independent contractor; or
- The worker’s schedule is not the typical week day 9 a.m. – 5 p.m. schedule.
What Makes a Worker an Employee
The proper analysis is evaluating your ability to control what the worker does, how they will do it, and when they will do it. If you have the ability to control the worker’s behavior or you have financial control over the worker, you need classify them as—and pay them as—an employee. There are a number of factors that the IRS and state governments will consider if evaluating whether your worker is a contractor. If you are unsure whether your worker should be an employee or an independent contractor, our office can help walk you through the factors and how it affects the worker’s classification as either an employee or an independent contractor.
Federal Employment Tax Deposit Requirements
If you have one or more employees, you are responsible for paying federal employment taxes through either monthly or semi-weekly deposits. Federal employment tax deposits must be made by electronic funds transfer (“EFT”). Generally, the EFT payments are made through the Electronic Federal Tax Payment System (“EFTPS”). It is important to know when your federal tax deposits are due as failing to meet the deadlines will result in the assessment of penalties.
If you are a new business, for your first year you must make monthly deposits for the first calendar year of the business.
Semi-weekly or Monthly
If you have been in operation for over a year, your deposit schedule is determined by a look back period. The look back period for the current tax year begins on July 1 and ends on June 30. For example, your deposit schedule for 2022 will be determined by the total amount of federal employment taxes paid from July 1, 2020 – June 30, 2021. If you paid more than $50,000 in federal employment taxes over the lookback period, you must make semi-weekly deposits, and if you paid $50,000 or less then you must make monthly deposits.
Monthly deposits are due on the 15th of each month while semiweekly deposits are due on either the Wednesday or Friday of the week following your payday depending on which day of the week your payday fell on.
Penalties will be applied to the late deposits ranging from 2% to 15% depending on how late the deposit was made.
Federal Employment Tax Return Requirements
Unless you are an agricultural business (there is a separate form for agricultural employees), if your business has employees, then you must file either Form 941 or Form 944 with the IRS. Employers that pay more than $1,000 in federal employment taxes annually must file a quarterly employment tax return—Form 941—with the IRS. Forms 941 are due for each quarter on the following due dates:
First Quarter (January 1 – March 31): April 30
Second Quarter (April 1 – June 30): July 31
Third Quarter (July 1 – September 30): October 31
Fourth Quarter (October 1 – December 31): January 31
If you pay less than $1,000 in federal employment taxes annually, then your business can request to file Form 944. Form 944 is an annual employment tax return instead of a quarterly return like Form 941. Form 944 is due on January 31 of the following year.
Employers that had employees work on 20 or more different weeks throughout the year or paid more than $1,500 in wages during any quarter of the calendar year, must also file an annual federal unemployment tax return—Form 940. Form 940 is due on January 31 of the following year.
Required Federal Informational Statements
If you have employees, you must issue them a W-2 detailing their wages and taxes for the year and send a copy of the W-2 to the Social Security Administration. You must file the W-2s with the Social Security Administration by January 31 and must provide your employees their copy by January 31 as well. Employers must also file Form W-3, which details the total amount of wages and taxes paid to all employees, with the Social Security Administration by January 31. Failing to timely file these informational statements will result in the assessment of penalties.
If you paid a contractor more than $600 during the calendar, then you must issue them a Form 1099-NEC detailing the amount paid to them for their services. The Form 1099-NEC for non-employee compensation must be filed with the IRS on or before February 1. Failing to timely file the 1099s with the IRS will result in the assessment of penalties.
This article does not contain all employment tax obligations and is not legal advice. If you have any questions about your business’s employment tax filing and payment obligations, please reach out to our office for assistance at 651-262-2080 to set up a meeting or call.