Tax challenges can be VERY expensive
As a small business owner, you may face the issue of whether to classify workers as employees or as independent contractors.
Classifying your workers as independent contractors generally saves you money. That’s because you avoid paying employment taxes and benefits on their behalf.
If the IRS determines that you misclassified your employees as contractors, you could end up paying all of the employment taxes and benefits that would have been paid over the years. Depending on the size of your work force, the cost to your business could be substantial.
In determining whether the person providing a service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered. There are three primary categories of control and independence that the IRS considers when determining if a worker is a contractor or an employee:
- Behavioral. Does the company control or have the right to control what the worker does and how the worker does his or her job? If yes, the worker is an employee.
- Financial. Are the business aspects of the worker’s job controlled by the payer? This includes things like how the worker is paid, whether expenses are reimbursed and whether the employer provides tools and supplies. If yes, the worker is an employee.
- Type of relationship. Are there written contracts or employee-type benefits? If contracts are involved, the worker may be a contractor. If benefits such as a pension plan, insurance and vacation pay are made available, the worker most likely is an employee.
Deciding whether a worker is a contractor or employee can get complicated. And remember that there are significant financial consequences for incorrectly classifying a worker.
Handling employment taxes can be complicated, especially when you’re required to file important tax documents throughout the year. Here’s a list of key forms and deadline dates to help keep you on track.
Form 941 — Employer’s quarterly federal tax return
This form is used to report income tax withheld from employees’ pay and both the employer’s and employees’ share of Social Security and Medicare taxes.
Employers generally must deposit Form 941 payroll taxes on either a monthly or semiweekly deposit schedule. There are exceptions if you owe $100,000 or more on any day during a deposit period, if you owe $2,500 or less for the calendar quarter, or if your estimated annual payroll tax liability is $1,000 or less.
- Monthly depositors are required to deposit payroll taxes accumulated within a calendar month by the 15th of the following month.
- Semiweekly depositors generally must deposit payroll taxes on Wednesdays or Fridays, depending on when wages are paid.
Return filing deadlines:
- Jan. 31, 2020 – Due date for filing Form 941 for the fourth quarter of 2019. If you deposited your taxes in full and on time, you have until Feb. 10, 2020, to file this return.
- April 30, 2020 – Due date for filing Form 941 for the first quarter. If you deposited your taxes in full and on time, you have until May 11, 2020, to file this return.
- July 31, 2020 – Due date for filing Form 941 for the second quarter. If you deposited your taxes in full and on time, you have until Aug. 10, 2020, to file this return.
- Nov. 1, 2020 – Due date for filing Form 941 for the third quarter. If you deposited your taxes in full and on time, you have until Nov. 10 to file this return.
Form 940 — Employer’s annual federal unemployment tax return (FUTA)
This return is due annually. However, FUTA tax must generally be deposited once a quarter if the accumulated tax exceeds $500.
- Jan. 31, 2020 – Due date for filing 2019 Form 940. If you deposited your taxes in full and on time, you have until Feb. 10, 2020, to file this return. This day is also the deadline for depositing federal unemployment tax for October, November and December 2019.
- April 30, 2020 – Deadline for depositing federal unemployment tax for January, February and March 2020.
- July 31, 2020 – Deadline for depositing federal unemployment tax for April, May and June 2020.
- Nov. 1, 2020 – Deadline for depositing federal unemployment tax for July, August and September 2020.
Form W-2 — Wage and tax statement
Employers are required to send this document to each employee and the IRS at the end of the year. It reports employee annual wages and taxes withheld from paychecks.
- Jan. 31, 2020 – Due date for employers to provide 2019 Forms W-2 to employees, and for employers to send copies of 2019 W-2s to the Social Security Administration, whether filing electronically or with paper forms.
Tax deadline extensions for disaster areas
For taxpayers living in designated disaster areas, the IRS extends certain filing and tax payment dates. Taxpayers living in the affected areas (and those whose tax professionals are located in those areas) have relief from penalties for filing under the new extended dates. These filing and payment extensions are also available to some relief workers.
Visit the IRS’s Disaster Assistance and Emergency Relief for Individuals and Businesses page for up-to-date information.