When Must You Withhold Taxes For Someone Who Works For You?

If you have employees, chances are you must withhold taxes.

By , J.D. · USC Gould School of Law

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If your business is getting to the point where you're beginning to need a little outside help, you might be wondering whether you're 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're 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.

Who Is Considered an Independent Contractor?

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. To make this determination, examine the individual's relationship to your business. The IRS uses the "right of control" test to determine if a worker is an employee.

"Right of Control" Test

If you have the right to direct and control the way a worker performsboth as to the final results and the details of when, where, and how the work is donethen the worker is your employee. In contrast, if your control is limited to accepting or rejecting the final results a worker achieves, the worker is an independent contractor.

You need to consider any information that indicates the extent of your control over the worker, as well as any information regarding independence. You might have to pay penalties to the IRS if you incorrectly determine that an employee is an independent contractor.

When You're Responsible for Payroll Taxes

If a worker is an employee, you'll be responsible for payroll taxes. So, you'll need to withhold state and federal income taxes as well as Social Security and Medicare taxes from the employee's wages. You'll also be responsible for paying a matching amount of Social Security and Medicare taxes for the employee.

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-NEC.

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