There are some small business owners that do not know anything taxes, which is why they hire a CPA firm to begin with. However, small business owners should have an understanding about payroll taxes; even if it is a minimal understanding. They should understand what advantages or deductions they may have, as well as what to look for when hiring employees.
When dealing with small business payroll taxes, it is important to know the difference between an independent contractor versus an actual employee. You need to know the benefits of hiring an independent contractor and what taxes you need to cover if hiring employees. Although you may hire or outsource someone else to do your payroll it is important to know the difference.
Utilizing the services of an independent contractor means that you will not have to pay the usual employment taxes that are associated with hiring an employee. This items include FICA, which is social security and medicare and the employer is responsible for matching the amount that is taken out of an employees check. Whereas an independent contractor is responsible for these items. However, you must remember that an employee is an individual that directly reports to the company and is supervised. An independent contractor on the other hand is a freelance worker, they supply their own supplies and make their own hours.
It is very important to understand the additional added expenses associated with having an employee versus an independent contractor. When you have an employee you are responsible for so many different items that it can be costly in the end. However, with an independent contractor, you are basically paying for their services. They are responsible for their own payroll taxes, supplies and tax returns. With an employee you are also responsible for paying federal and state unemployment insurance, all of this can add up especially if you are a new business trying to get a start.
The importance of hiring a CPA firm is to eliminate the stress of needing to know the differences between the various type of corporations, what forms to file and what taxes need to be paid. What type of company you are determines what type of additional taxes you will need to pay. If you are a business owner that is just starting out maybe you don’t have a CPA firm, then you would need to make sure you have an understanding of payroll laws and deposits as well as knowing when they are due. This is why most business owners choose to hire a CPA firm even if it is an additional cost to them.
Trying to decide if someone is an employee or an independent contractor can be quite confusing at times. This is why the IRS has published a test on their website entitled the IRS 20 point test. This helps to determine whether or not an individual should be classified as an employee or an independent contractor. There are a lot of rules that need to be followed with regards to payroll taxes and it is your responsibility to insure that you are complying.