Part-Time, Full-Time: Understanding Employment Options & Tax Implications
For business owners, tax season is especially nerve wracking. You have more people, items, and writeoffs to claim than most. Without filing properly, you might get audited and have an even bigger headache to contend with.
The types of employees you have in your business play a key role in how your taxes are calculated. Here are some of the key differences, as well as the pros, and cons to having each type of employee working in your company.
Full-Time Employee Tax Requirements
Full-time employees are defined as anyone who works more than 30 hours for your business per week.
The tax implications for full-time employees can change depending on how many people you have working in this capacity. If you have over 50 full-time employees, you are required to offer health insurance under the new Affordable Care Act. This health insurance must be shown on your taxes.
There is an exception to the health care rule. If your business hires full-time employees for less than 120 days during the year, they are considered seasonal workers and are exempt from this rule.
Full-Time and Part-Time Employee Tax Requirements
Regardless of whether your employees are seasonal, part-time, or year round full-time employees, as an employer, you pay taxes on this labor. These are called Payroll Taxes.
Payroll taxes are a percentage of each employee’s wages.
As an employer, you’re required to withhold certain amounts from each of your employee’s paychecks. These amounts are then sent to the Internal Revenue Service (IRS.) Payroll taxes include:
- Federal taxes
- State taxes (when applicable)
- Local income taxes (when applicable)
- Social Security
- Disability Insurance (when applicable)
Here’s a closer look at the breakdown of the main elements that incorporate all these types of taxes.
Federal Income Tax
There are two ways you can pay federal income taxes.
- The Wage Bracket Table: This table allows you to choose the right wage bracket and the type of pay period you want to implement (daily, weekly, bi-weekly, semi-monthly, or monthly). Based on that decision, you will know what type of payroll taxes are due.
- The Percentage Tables: This is similar to the wage bracket table but it also takes marital status into account.
Before you give your first paycheck to an employee, it’s important to select the right approach for your business.
State Income Tax
Each state varies on how they approach income tax. Some states, like Texas, don’t have income taxes. Talk to your accountant about how you should be calculating your state income tax obligations.
Federal Insurance Contributions Act (FICA) includes the tax obligations for Social Security and Medicare withholdings. As the employer, you pay half of this obligation. The employee pays the other half.
As the employer, you’re required to pay unemployment taxes (FUTA). This is only applicable if you pay at least $1,500 to an employee each quarter and you have at least one employee for 20 weeks each year.
Contractors and Freelancers
There are some workers that you will not have to pay taxes on. These are called contractors or freelancers. Instead of having to deduct payroll taxes from each paycheck, the contractor bears the burden to pay all taxes on his or her end.
Independent contractors typically anticipate this high tax burden and bake it into their costs. Still, you save on all the employer mandated benefits and tax obligations, so in the end, you could actually save money by working with a contractor as opposed to hiring an employee – even when the hourly rate seems higher.
How to Determine Your Taxable Employees
You could get in serious trouble by trying to skirt your tax obligation and claiming an employee is a contractor or freelancer. With that said, it’s not always completely clear which people are contractors and which must be categorized as employees.
Here are a few questions to ask yourself to determine which is more appropriate for your business:
Do you have the right to direct or control the worker?
If you do not maintain direct control over the workers hours, scheduling, or duties, the worker is a contractor. On the other hand, if you require your worker to be present at certain hours and maintain the right to direct during that time, the worker is an employee.
How does the worker view the relationship?
Does the worker consider you his or her boss? Does the worker plan to work under you indefinitely? If so, he or she is considered an employee. On the other hand, if the person is only contracted for a specific project or a short period of time, the person is an independent contractor.
Does the person advertise his or her services outside of the work done for your company?
Independent contractors have the freedom and flexibility to advertise their services to gain new clients. If a person does not have that flexibility, and you require that person only works with you, giving you financial control over the situation, the person is an employee.
There is a lot that goes into distinguishing independent contractors and employees. Getting it right is important to how you pay and the longevity of your business so making the distinction shouldn’t be taken lightly.
What About the Owner?
As a business owner, you might also be subject to payroll taxes. Even if you do not have any outside employees working for your business, but your company is incorporated, you will need to pay payroll taxes on your own paychecks. This can get confusing, so it is highly recommended that you work with an accountant and CPA to clarify your tax obligations.
What Happens if You Don’t Pay?
Staying on top of your tax obligations is critical. Without paying the right amount, or by categorizing a worker incorrectly to avoid paying taxes, could cost your business. This is a serious offense and not one that the IRS takes lightly.
If you have questions or concerns about your taxes, it’s highly advised that you work with an accountant.
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Jon Forknell is the Vice President and General Manager of Atlas Business Solutions, Inc., a software marketing company specializing in employee scheduling software, including ScheduleBase employee scheduling software, and other business software solutions. In the past, Jon has been recognized by the U.S. Small Business Administration as a SBA Young Entrepreneur of the Year. Atlas Business Solutions was named as one of Software Magazine's Top 500 Software Companies 2004-2007 and again in 2010, 2013, 2014, 2016 and 2017.Read Full Bio