What Is the Difference between Wages, Payroll and Fees? An employee is someone you hire to perform specific and regular functions in your business. An employee can be paid by the hour, by a percent of sales, with commissions or on a salary. Wages refers to the compensation given to an employee regardless of how structured. Wages can be paid weekly, biweekly, monthly or even annually. Fees are paid to Independent Contractors who are contracted to provide a specific service. These are sometimes referred to as Outside Services. The service can be a one-time service, or an ongoing function Do I Have To Withhold Taxes from Wages and Fees? If you have hired an employee there are specific amounts that must be withheld and forwarded to government agencies. You do not have to withhold amounts from an independent contractor unless that contractor fails to provide you with a Social Security number. |
What Is the Difference between an Employee and an Independent Contractor? An employer has obligations and duties regarding an employee he hires. An employee is hired to perform a specific job, is told how to perform it and when to perform it. In exchange the employee is paid wages. If the employee cannot fulfill the job requirements, the employer has the right to fire the employee and fill the position with someone more qualified. An Independent Contractor works for himself and for a profit. An agreement is entered into between the contractor and a customer or client for a specific job or function. It may or may not be on an ongoing basis. The Independent is not told how to perform the service or when to perform the service. Are There Penalties If I Do Not Withhold Amounts From My Employees Paychecks And Send it To The IRS? Yes, very stiff penalties from both the Federal and State governments. The IRS can assess a 100% penalty on the amount of payroll taxes that should have been paid, plus interest. |
How do I determine if The Person I Hire is an Independent Contractor or Employee? It is vital that you know the difference between an employee and an independent contractor. IRS Publication 937 outlines 20 factors to determine if the person you contract is an independent contractor or an employee. Take the Independent Contractor Test below to determine if the person is an employee or can be paid as an Independent contractor: |
What Will I Need To Legally Hire an Employee? The first step in reporting and paying wages is to obtain a Federal Tax Identification number.IRS form SS4 needs to be filed and a tax ID number will be assigned to your business. You will also need IRS form W4 filled out for each employee. These can be obtained by from your payroll processor or local IRS office. Acrobat Reader, free download |
When Should I Hire Someone To Handle My Payroll? As soon as you hire your first employee you should find someone well versed in payroll law to handle your payroll and ensure the proper amounts are withheld, forwarded and reported to Government agencies. |
What Will I Need To Legally Hire an Independent Contractor? Have the person fill out IRS Form W9 which can be obtained from your payroll processor or local IRS office. Although it is not a legal requirement, it is recommended that you have a contract drawn up specifying the job or function the Independent will perform and the fees that will be paid. |
