Businesses are always making decisions regarding the future of projects and help. We have discussed outsourcing here before, but sometimes it is better for the business to bring on a part-time or full-time employee to help keep your business growing. Here are some of the taxes you have to pay when hiring additional staff.
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Freelancers – 1099 Only
Before we get into the complexities of employees, make sure you are treating freelancers and outsourced organizations correctly. If you bring on someone to work on a project, they are considered a freelancer or vendor, not an employee.
For anyone paid over $600 per year, you are required to submit payment information to the IRS and give the freelancer or vendor a 1099 form outlining their earnings.
When you pay someone and keep them on as a freelancer or vendor only, you are not responsible for additional taxes. Make sure you follow IRS rules when designating someone a freelancer vs. an employee.
Employee – Payroll and Withholdings
If you bring someone on as an employee, you have to do more extensive tax work. When I have paid employees in the past, I used accounting software like QuickBooks to make the process easier. I was able to handle it all myself.
Federal Payroll Taxes and Withholdings
When you have an employee, you have to make the following payroll deductions per IRS rules:
- Federal income taxes per form W-4
- Social Security tax withholding and employer payment
- Medicare tax withholding and employer payment
Employer payments are 6.2% of pay up to $113,700 per year (2013) for social security and 1.45% for Medicare. That is a tax the employer pays in addition to the withholding from the employee, which is for the same amount. Employees must pay an additional Medicare tax if income is over $250,000.
State and Local Taxes and Withholdings
Each state has different rules, but most require employers to withhold payments for employees and pay additional taxes. Some municipalities also have taxes for employees working in city limits.
Federal and State Unemployment Tax
Employees don’t have to pay unemployment taxes, but employers do. Unemployment taxes are generally small, but are a responsibility of employers.
Paperwork
It is not as simple as just withholding and paying taxes. You also have to file paperwork for employees that goes along with the payments and employee paychecks. You are responsible for informing employees and government agencies of your employee income and filing specific tax forms for each type of payment.
The paperwork is not very hard if you use payroll software. You could also just outsource your employment work to a firm that takes care of everything for you for a fee.
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