Are you going to hire contractors or employees? Maybe you’re doing fine on your own right now but want to expand in the future. You must nonetheless understand and get a payroll system.
Payroll is another time-consuming but necessary aspect of accounting. Independent contractors and employees are categorized differently and provide your business with different tax deductions. Here’s how to deal with both.
Employees must complete a W-4 form so that the company knows how much tax to withhold. In exchange, you should give employees a W-2 form that summarises their annual gross pay. This is used to pay personal taxes.
The following are tax deductible for the company:
- Employee wages (salaries and commission bonuses),
- employee education expenses
- employee benefits (accident and health plans, adoption assistance, life insurance, and other benefits)
- Payroll taxes are employment taxes paid on behalf of your employees (like Social Security and Medicare as well as federal and state unemployment taxes).
Independent Contractor Payroll
Freelancers, consultants, and other outsourced experts who aren’t formally employed by your company are examples of independent contractors. You do not pay benefits or withhold taxes on behalf of contractors.
Therefore, if you pay contractors more than $600 a year, you must provide a 1099-MISC form in exchange for their W-9 form, which allows you to obtain information about their company (such as their SSN or EIN).
A 1099 form informs the government of how much you paid for their services so that you can include it on your tax return and they can assume the tax burden on their return.
The tax laws are very complex. Our short blog articles cannot cover in full all the nuances of the rules. Your specific facts may hold various opportunities and possible risks that only trained, experienced, and highly qualified tax specialists can spot. We encourage you to find such help, rather than trying to figure it all out on your own. Consider giving this marketplace a try by posting your project and signing up here.
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