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IRS Definition of Employee
Every business must understand the definition of an employee. If a business pays self-employed contractors, it does not need to withhold taxes from that pay. But with an employee, the business must calculate income, social security, and unemployment taxes based on wages.
What is the difference between a self-employed and employed worker? With an employee, a business has:
- The authority to decide the way he or she works
- Direction over the business and financial components of a job (whereas independent contractors make those decisions themselves)
- A relationship with the employee that is understood as an employer-employee type
Some businesses attempt to classify workers as independent contractors when there is no other reason to besides tax avoidance. But if they can show that workers are not employees, they can reduce their tax burden.
How to Pay Employee Taxes
As a business, it is your responsibility to send withheld employment taxes to the IRS through an electronic funds transfer, along with Medicare and social security taxes. Before each calendar year starts, you also must decide which payment schedule you will use: either semi-weekly or monthly. Being late can cost you a percentage of the taxes.
You must also pay unemployment taxes every quarter if the amount exceeds $500.