There are many changes to payroll going on right now. To help you prepare for 2011 payroll here is a link to the new withholding tables: 

http://www.irs.gov/pub/newsroom/notice_1036.pdf

Payroll employee versus independent contractor

“It’s only one person”, “my employees are part time” or “it’s a temporary job for just a few months…” can’t I just hire these workers as contract labor and not bother with making them employees?  This question is posed often by many employers.   Perhaps even you have thought about this.   Be careful.  The wrong answer could cost you, literally, thousands of dollars.

Whether the person is an independent contractor or an employee is based on several different factors.  Listed below is a summary of things to consider. The IRS also has a 20 factor list to help you make your determination.  Both the IRS and several states have penalties for misclassifying employees.  For example, in Colorado if you willfully misclassify employees as independent contractors the penalty for the first violation is $5,000 per employee and a subsequent violation is $25,000 per employee.  Plus you have to pay all the employer taxes that you should have paid and the penalties and interest on those taxes.  It’s simply not worth it.  If you think that you can plead ignorant of the law, think again.  The IRS says that, as a business owner, it’s your responsibility to know the laws and follow them.

This list of considerations will help you determine if the person you want to hire is an employee or independent contractor:

1. Is there behavioral control?

When you hire employees generally you decide what hours they work, what work they will do and how they will do it. You are providing the space, the tools and guidance on what you expect from them.

Independent contractors - you tell them the final outcome and it’s their responsibility to get the job done in the time allowed but they can decide how they’ll do the work and provide their own tools and supplies. They have the option to hire others to help them if needed. They may even do much of the work off site.

1. Is there financial investment?

Employees are paid hourly or salaried wages on a recurring pay cycle. General business expenses are reimbursed.

Independent contractors are usually paid by the job or project.  They find out what’s involved in the project you are hiring them for and the give you a bid for the project. They invoice you to get payment.  They pay for their own expenses, supplies, etc. They can lose money if they have more in expenses than what they charge you.

1. Employees generally only work for one employer at a time. Independent contractors offer their services to the public and maybe working several jobs at the same time.

For some businesses, this list may not take into account your circumstances. We recommend you take the extra the time to accurately determine whether your new hire is an employee or an independent contractor.  As your accountant we are here to help you.  Call us and we’ll help you make the correct determination and as the old adage says, “Better safe than sorry.”