by Rachel Fields
If your business is getting to the point where you are beginning to need a little outside help, you may be wondering whether you are required to withhold and pay taxes for that help. Generally that depends on whether the people you hire are classified as "employees" or "independent contractors." You are required to withhold and pay taxes for those workers who are classified as employees. Independent contractors, on the other hand, are responsible for their own taxes.
You can't just decide to call anyone who works for you an independent contractor, though. Whether or not a worker is an employee or an independent contractor is a legal determination. In order to make this determination, examine the individual's relationship to your business. You need to consider any information that indicates the extent of your control over the worker as well as any information regarding the independence of the worker. Generally, employees have little control over their work, while independent contractors have a high degree of control over their work. Read the related article, Employee or Independent Contractor, for more information. You may have to pay penalties to the IRS if you incorrectly determine that an employee is an independent contractor. If you want it to, the IRS will make the determination for you-- simply file Form SS-8.
If a worker is an employee, you will be responsible for payroll taxes. This means you will need to withhold state and federal income taxes as well as social security and Medicare taxes from the employee's wages. You will also be responsible for paying a matching amount of social security and Medicare taxes for the employee. For more information on payroll taxes, read the related article, What are Payroll Taxes.
If a worker turns out to be an independent contractor, your business must still report the amount you pay the worker to the IRS, if it is $600 or more. You will report this income on IRS Form 1099-Misc.