Title
Janene's Story
Hi, I'm Janene.
I've just started my own real estate company,
and I have six people working for me.
Some of them work in the office,
performing administrative duties,
and some of them are real estate agents.
I've been classifying everyone as an employee,
but based on some of the reading I've been doing
I'm not sure that's right anymore.
I also thought I was doing what I was supposed to be doing
regarding my federal tax obligations
as a business owner with employees
but again, now I'm not so sure.
Can you help me help myself-and my workers?
Janene, we have exactly the information
you're looking for.
Welcome, everyone,
to What You Need to Know about Federal Taxes
when Hiring Employees or Independent Contractors.
In this lesson,
we'll discuss Janene's- and your-responsibilities
as an employer
or as one who pays others for services
in the course of your trade or business.
Whether you're handling this yourself like Janene is,
or paying someone else to do it,
you need to know your responsibilities.
Overview
In this lesson...
you'll learn about the differences
between an employee and an independent contractor;
how to determine eligibility to work legally
in the United States;
the importance of the Form W 4
and the employer's responsibility
regarding withholding;
how to verify work names and Social Security numbers;
the purpose of the state new hire registry;
the process for filing Form W 2;
your obligations to notify employees
about the Earned Income Tax Credit;
the role of Individual Taxpayer Identification Numbers;
and finally, the process for enrolling in
and using the Filing Information
Returns Electronically system, also known as FIRE.
Publication 15, (Circular E) Employer's Tax Guide
Before we begin, we'd like to remind you
that much of the information in this lesson
is available from IRS Publication 15,
Employer's Tax Guide.
Employment Taxes
As an employer, you are responsible for withholding
and for paying certain taxes
from your employee's paychecks.
These taxes are for their income taxes and their FICA;
that is, Social Security and Medicare taxes.
I've heard these referred to as trust taxes?
What does that mean?
They are sometimes called trust taxes
because you hold them on behalf of,
or in trust for,
your employees before you deposit them
to the Treasury.
In addition, you have to pay
the employers' matching share of FICA taxes
and in most cases...
you will have to pay the federal unemployment tax,
also known as FUTA tax.
In most cases, however,
you do not have to withhold
or pay any taxes on payments made
to independent contractors.
Worker classification - Employee v. Independent Contractor
But how do I know if the person working for me
should be classified as an employee
or as an independent contractor?
Good question, Janene.
The courts have considered many facts
in deciding whether a worker is an employee
or an independent contractor.
These relevant facts
fall into three main categories:
behavioral control;
financial control;
and the relationship of the parties.
In each case, it is very important
to consider all the facts
as no single fact provides the answer.
Behavioral control
What is meant by behavioral control?
The facts about behavioral control
show whether there is a right to direct
or to control how the worker does the work.
A worker is an employee
when the business has the right to direct
and to control the worker.
The business does not have to actually direct
or to control the way the work is done-
as long as the employer has the right to direct
and to control the work.
So as an employer, ask yourself:
Does my business have the right to direct
and to control how the worker does the work
I hired them to do?
Do I direct when and where to do the work?
Do I determine what tools or equipment to use,
or where to purchase supplies and services?
Do I control hiring?
Do I control what work a specific individual must do,
and the order in which that work must be done?
Do I train the worker?
Generally, if you have the right to control
what will be done
and how it will be done,
the worker is an employee.
Okay, so that's behavioral control.
Financial control
What about financial control?
Financial control is another important factor
you must consider.
Again, ask yourself:
Who directs or controls
the business aspect of the work?
As an employer with employees,
you would direct or control
the business aspect of the work.
Independent contractors, however,
are in business for themselves.
They usually offer their services to the public
and may have a significant financial investment
in their business.
They may also have their own tools and equipment.
Independent contractors are more likely to have
out-of-pocket business expenses
and can have profits or losses.
Relationship with the worker
And the final area-
my relationship with the worker?
When considering this final area,
think about the relationship
you intend to have with your worker.
If you provide employee benefits
such as health insurance, a pension plan,
or paid vacation or sick days,
this generally indicates
an employer/employee relationship.
Also, consider the importance
of the worker's services.
If the worker provides services
that are a key aspect
of your regular business activity,
it is more likely
that the worker is an employee.
Determining worker status
It's important to remember that just signing a contract
does not automatically make the worker
an independent contractor.
Deciding the worker's employment status up front
is important for you and for the worker.
If you misclassify workers as independent contractors
and you have no reasonable basis for doing so,
you may be liable for their employment taxes
and have to pay all the employee's taxes.
I can see why this is so important,
but what if I'm still not sure
whether a worker should be classified as an employee
or as an independent contractor?
If you're still uncertain
about a worker's employment status,
the IRS can help.
Form SS-8
You can send in Form SS 8,
Determination of Worker Status
for Purposes of Federal Employment Taxes
and Income Tax Withholding,
and the IRS will send you
and the worker a determination letter.
You can find Form SS 8 at www.irs.gov.
Determining the status of a worker
is just the first step
in understanding your federal tax responsibilities.
Before we continue, though, we have a question for you,
and your answer will help us customize this lesson.
Please choose one of the following:
You have only employees working for your business.
You have only contractors working for your business.
You have both employees and contractors working
for your business.
Employer responsibilities if you have employees
Now we're going to go into detail
about your responsibilities
if you have employees.
There seem to be a lot of responsibilities-
what are they exactly?
Janene, you have numerous responsibilities
as a business owner with employees.
Section Overview
In this part of the lesson, we are going to cover...
eligibility to work legally in the United States,
Form W 4,
Social Security number verification,
the state new hire registry,
Form W 2,
the Earned Income Tax Credit,
and Individual Taxpayer Identification Numbers.
Determining eligibility of employees to work legally in U.S.
Let's start with how to determine the eligibility
of your employees to work legally
in the United States.
As an employer,
you are responsible for determining that employees
are legally eligible to work in the United States.
To work in the United States,
the employee must be a US citizen;
a national, or legal permanent resident;
or must have been granted authorization
to work in the US.
Form I-9
US Citizenship and Immigration Services, or USCIS,
requires that all employers and employees complete Form I 9:
Employment Eligibility Verification.
While citizens and nationals of the US
are automatically eligible for employment,
they, too, must present proof of identity
and employment eligibility
by completing Form I 9.
As an employer,
you complete the employer section of the form.
This certifies that you have reviewed original documents
establishing the identity and employment eligibility
of the employee.
Form I 9 lists several documents
or combinations of documents
that the employee can show you
to satisfy this requirement.
For example, an employee may provide a US passport
or a driver's license and a birth certificate.
Where can I find Form I 9,
and what are my responsibilities
about reviewing and accepting the form
from my employees?
You can find Form I 9,
as well as more information
at the USCIS's Website,
www.uscis.gov/i-9.
The employee has three business days
from the date employment begins
to show you the required documentation
or a receipt for a replacement document
if documents are lost, stolen, or destroyed.
While you can terminate the employment of any employee
who does not submit a completed Form I 9
and the required documentation,
you must apply this rule
to all of your employees.
Employers are not responsible
for the authenticity of documents;
however, if a document does not appear genuine,
do not accept it.
You do not need to file the I 9 with USCIS.
But you must keep the I 9 for three years
after the date of hire
or one year after employment ends,
whichever is later.
For more information, we encourage you
to view the lesson "Hiring People Who Live in the U.S.
but Who aren't U.S. Citizens."
Form W-4
Form W-4, Employee's Withholding Allowance Certificate
Alright, I understand about Form I 9,
but what about Form W 4?
Each employee must complete a Form W 4:
Employee's Withholding Allowance Certificate.
Use the employee's gross wages
and the information on the Form W 4
to calculate the amount to withhold.
This information includes the employee's marital status,
the number of withholding allowances claimed,
the employee's desire
to have additional tax withheld,
and an employee's claim
to exemption from withholding, if applicable.
If an employee does not give you a signed W 4,
withhold tax at the single rate
with no withholding allowances.
If an employee claims to be exempt from withholding,
that exemption only applies to income tax,
not to Social Security or to Medicare taxes;
that is, the FICA taxes.
Employees claiming exemption from withholding
must submit a new W 4 each year by February 15th
to re-establish their exempt status.
Verification of employees' SSNs
Now, let's turn our attention towards verification
of employees' Social Security numbers.
Another responsibility you have as an employer
is that you are required to get and to verify
each of your employee's Social Security numbers.
How do I do that?
The Social Security Administration
offers employers three methods
to verify employee Social Security numbers.
First, you can use
the Social Security Number Verification Service
to verify up to 10 names
and Social Security numbers instantly or upload batch files
of up to 250 thousand names and numbers
and receive results the next business day.
Employer W-2 Filing Instructions & Information
To explore these options further
and to become a registered user,
visit www.ssa.gov/employer
and click on the Verify SSNs Online link.
Second, in an emergency situation,
employers can call the employer 800 number
at 1.800.772.6270
and, once your user authentication is complete,
an agent will provide the name
and Social Security number verification
over the phone.
Third, you can submit your request on paper
to your local Social Security Administration office.
Your local office will provide you
with formatting and submission instructions.
Some offices even accept faxed listings.
When you do the SSN verification,
the Social Security Administration
will only tell you
if the name and Social Security number match.
They will not tell you the correct Social Security number.
If the name and the number do not match,
it's up to you to get the correct name
or Social Security number from your employee.
State Hire Registry
In addition to getting and verifying
personnel information for payroll purposes,
what else do I have to do?
Once your employees provide that information,
and you've verified it,
you must also send information on new employees
to your state's new hire registry.
The state matches records
from the new hire registry
against child support records at the state
and national levels to locate parents
who owe child support.
The information to send includes
your business name and address; your EIN;
and the name, address, and Social Security number
of the new hire.
Because most of this information is on a completed Form W 4,
many states accept a copy of the Form W 4
with employer information added.
Quarterly wage reports
and unemployment claims are also required.
To find the specific requirements in your state,
go to your state's Website.
Form W-2, Wage and Tax Statement
Form W-2, Wage and Tax Statement
Employer W-2 Filing Instructions & Information
So far, we've covered Form I 9, Form W 4,
verifying Social Security numbers,
and the state new hire registry.
What's next?
Next, Janene, we're going to talk about Form W 2.
As an employer, you must complete a Form W 2:
Wage and Tax Statement,
for each of your employees every year.
The Form W 2 shows
the amount of compensation paid to employees
and the amount of tax withheld for the year.
The Social Security Administration
also uses this form
to update the employee's lifelong earning history
and then, from that earning history,
calculate the employee's benefits.
Penalty for non-matches
Because this information is so important,
you can be assessed a penalty for W 2 names
and Social Security numbers that do not match.
See Instructions for Forms W 2 and W 3
for more information on penalties.
So, as you can see, it is important
that an employee's name and Social Security number
as shown on Form W 4
match your payroll records and Form W 2.
Ensuring new employees provide correct information
But how can I be sure that my new employee
provided the correct information?
First, keep your payroll records up to date.
When you hire new employees,
always verify the name and Social Security number.
Ask them to show you their Social Security card
if it's available.
It's okay for you to photocopy the Social Security card,
but it isn't required.
Second, remind employees to report
any name change due to marriage, adoption,
divorce, or other circumstances
first to the Social Security Administration
and then to you.
Form SS-5
Make sure employees know
that notifying their employer of a name change
is not enough.
They must complete Form SS 5:
Application for a Social Security Card,
to have the change made on their Social Security record.
Form SS 5 and additional information
are available at www.ssa.gov.
Document the steps you take
Documenting the steps you take to obtain
and correct any name and Social Security number mismatches
may help you avoid costly penalties down the line.
One of those steps is getting the Form W 4,
which also shows an employee's name
and Social Security number,
and keeping it in your files.
If you relied on the information provided
by your employee on their Form W 4
to prepare their Form W 2,
the IRS may waive the penalties;
the law does allow a waiver of penalties
where an employer had reasonable cause
for including incorrect information on Form W 2.
Issuing Forms W-2
When do I have to issue Form W 2s?
All employers must issue Form W 2s
to report wages and withholdings
to their employees by January 31st.
If your employee leaves before the end of the year,
you can give them their Form W 2 at any time
after they leave as long as it is before January 31st.
If any employee asks for their Form W 2,
you have 30 days after their last pay date
or 30 days after they leave,
whichever is later.
Filing Forms W-2 Electronically
Employer W-2 Filing Instructions & Information
It would be a big help
if I could file these electronically.
Can I do that?
You sure can, Janene.
In fact, the Social Security Administration
has two electronic filing methods.
Companies filing 2 hundred and 50 or more Form W 2s
must file electronically,
and electronic copies of the Form W 2s
must be sent to the Social Security Administration
by March 31st.
In the first method, you upload a wage report.
If you use software that matches the required format,
you can upload your files
to the Social Security Administration.
Software specifications and more information can be found
at www.ssa.gov/employer;
click on the Electronic W 2 Filing Handbook link.
In the second method, called W 2 Online,
you can complete up to 50 Form W 2s
at the Social Security Administration's Website
and print copies suitable for distribution
to your employees.
In this method, no software is required.
A Form W 3:
Transmittal of Income and Tax Statements,
is created for each W 2 Online report,
even if the multiple reports are for the same EIN.
Again, more information
can be found at the Electronic W 2 Filing Handbook link
at www.ssa.gov/employer.
Business Services Online (BSO)
Both online options require registration
with the Business Services Online,
or BSO, Website at www.ssa.gov/bso.
From the BSO Website,
select Register and complete the information.
You will be assigned a User ID immediately,
and you choose your own password.
Third-party preparers need to register only once
and not for every client they represent.
Of course, if you choose not to use the electronic system,
you may still send the Form W 2s by mail
along with your Form W 3s.
If you file by paper,
you'll need to file a whole month earlier,
by February 28th.
That covers the major areas of responsibilities to employees,
but there are two more topics we need to discuss:
The Earned Income Tax Credit
and Individual Taxpayer Identification Numbers.
Earned Income Tax Credit (EITC)
What responsibilities do I have towards my employees
regarding the Earned Income Tax Credit?
The Earned Income Tax Credit, or EITC,
is a refundable tax credit for people who work
but who do not earn high incomes.
As an employer, you may be required to notify an employee
that they may be able to claim a tax refund
because of the Earned Income Tax Credit,
and you must also notify employees
who have no income tax withheld
that they may be eligible for EITC.
We also encourage you to notify employees
when their income is below the maximum income
threshold allowed for claiming EITC
that they may be eligible for the credit.
This is because eligible employees
may get a refund of EITC
that is more than the tax that they owe.
Notice 797
You may use Notice 797,
Possible Federal Tax Refund Due to the Earned Income Credit,
to meet the notification requirement.
You can find a printable copy of Notice 797
on www.irs.gov.
Publication 15, Employer's Tax Guide
IRS Publication 15 lists other ways you can meet
the notification requirement.
Individual Taxpayer Identification Numbers (ITIN)
And, finally, what is an ITIN?
The IRS issues Individual Taxpayer Identification Numbers,
or ITINs, to individuals
who are required to have a US taxpayer identification number
but who do not have and are not eligible
to get a Social Security number
from the Social Security Administration.
ITINs are not valid for employment
and should not be used on workers' Form W 2s.
They do not provide eligibility for Social Security benefits
or the Earned Income Tax Credit.
An ITIN is a nine digit number
that always begins with the number 9
and has a 7 or an 8 in the fourth digit.
Independent Contractors
Form 1099 Miscellaneous
Now we're going to look at your responsibilities
regarding independent contractors.
For independent contractors,
you file Form 1099 Miscellaneous with the IRS.
Make sure you give a copy to the independent contractor
by January 31st.
If you choose to file Form 1099 with the IRS by paper,
the deadline is February 28th.
As with Form W 2s,
though, if you have 2 hundred 50 or more Form 1099s,
you must file electronically.
The deadline for filing electronically is March 31st.
You don't need a transmittal form
and filing electronically allows you up to ten days
from transmission to stop processing.
This means you have an opportunity
to make corrections to your final transmission
before the due date.
Filing Information Returns Electronically Using FIRE
How do I file electronically?
The IRS electronic system for filing Form 1099
is called Filing Information Returns Electronically,
or FIRE, for short.
Form 4419, Application for Filing Information Returns Electronically
To use the FIRE system, you must complete Form 4419,
Application for Filing Information
Returns Electronically, and mail or fax that form to the IRS
at least 30 days before the due date of the returns
for current year processing.
After the application is approved,
the IRS will assign a Transmitter Control Code to you.
When you receive your Transmitter Control Code,
you may create a User ID, password,
and Personal Identification Number, or PIN, right away.
Publication 3609, Filing Information Returns Electronically for Business Filers
For more specific information on using the FIRE system,
see IRS Publication 3609,
Filing Information Returns Electronically
for business e-filers.
Publication 1220
Although the FIRE system is easy to use,
you still must use the pre-approved software.
You can develop your own software
by following the specifications in IRS Publication 1220,
Specifications for Filing Forms 1097 BTC, 1098, 1099,
3921, 3922, 5498, 8935,
and W 2G Electronically.
Publication 1582, Information Returns Vendor List
To find a vendor who sells pre-approved software
or for a transmission service provider,
see IRS Publication 1582,
Information Returns Vendor List.
The IRS does not endorse or approve products
and services offered by these vendors;
the publication is simply for your convenience.
Filing Forms 1099 with your state
If I use the FIRE system,
would I also need to separately file Form 1099
with my state?
Many states have entered into an agreement with the IRS
to accept FIRE files,
which means you may not need
to file additionally with your state.
If you're in a participating state
and you want to participate,
you must send the IRS a test file.
Publication 1220
See IRS Publication 1220 for more information
on the FIRE system
and to see if your state participates
in the combined federal state filing program.
Lesson Summary
This has been a lot of information,
and I think I finally understand
what I'm supposed to be doing for myself
and for my workers.
But I'd still appreciate a review.
No problem, Janene.
First, we talked about differences
between an employee and an independent contractor.
And remember, there are three areas to consider:
behavioral control, financial control,
and the relationship of the parties.
Then, we discussed verifying work authorization.
Next, we discussed Form W 4s
and the employer's responsibility
regarding withholding
as well as verifying employees' names
and Social Security numbers.
After that, we mentioned the state new hire registry
and its purpose.
We also discussed Form W 2s
and the process for filing them.
We briefly mentioned the Earned Income Tax Credit
and Individual Taxpayer Identification Numbers.
And finally, we looked at filing Form 1099s
using the FIRE system.
I hope you found this lesson helpful.
As you are probably aware of by now,
there are many employer responsibilities
involved in meeting your tax obligations
and there's always more to learn.
Remember, if you have questions or need more information,
you can consult IRS Publication 15,
Employer's Tax Guide,
or contact the Business and Specialty Tax Line
at 1.800.829.4933.
Thank you for joining us.
Best wishes on your business.