There are a lot of things that you need to consider when starting up your business: attracting customers and clients, implementing the right technology solutions, and even finding the right space to house your business.
However, as the end of the year approaches, your biggest concern should be your financials – specifically the taxes associated with running your business.
Employment Taxes
You probably already know that you have to pay taxes for your business, but if you hire people to work for you, you also have to pay employment taxes. Employment taxes include tax on any income earned as well as FICA, also known as Social Security and Medicare. How you pay those taxes depends on how the people you hire are classified: Employees or Independent Contractors.
Independent Contractor
An Independent contractor is someone who is self-employed but does work for your company on a contract or as-needed basis. One example might me the accountant you hire to do your taxes each year.
Although he works for you, he has what is called complete freedom of action. This means that although you have some say in the quality of the final product, and can set deadlines for when the final product is due, you have no say in how, when, or where he completes the task.
Independent contractors are responsible for paying their own income and employment taxes. This means that you are not responsible for deducting FICA (Social Security and Medicare) or income tax on their behalf. However, you will be responsible for issuing a 1099 to them at the end of the year, and sending a copy of that 1099 to the IRS.
Employee
An Employee is someone who you hire to work for your company on an ongoing basis, usually in your office. One example might be the receptionist you hire to answer your phones and make appointments.
In the case of the employee, you do have a say in how, when, and/or where they complete their work. For example, you could have your receptionist working from home, but she must be on the clock during normal business hours, and she must work in a quiet space so that her calls sound professional.
With employees, you are responsible for paying/deducting employment taxes from each paycheck, and sending those funds to the IRS. You are also responsible for issuing each employee a W2 at the end of the year, and filing a copy of that W2 with the IRS.
Getting Guidance
The world of employment taxes can be confusing, especially since tax codes and laws change constantly.
You can find a wealth of information at the IRS website on what qualifies as an Independent Contractor vs. Employee, as well as the different classifications of employee (such as common-law and statutory). The site can also give you information on how and when to deduct employment taxes, and information on filing.
If you have several employees, your best bet is to hire an individual to handle your payroll and take care of all of the employment taxes, either as an employee or independent contractor. Another option is to hire a company that specializes in payroll administration and employment tax services.
Whichever option you choose, you should make sure that the individual or company has a strong background in payroll administration, accounting, and employment tax codes. That way you can be sure that everything is handled properly, and that your company meets its tax obligations.
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