Content area
Full Text
Are you worried about how to categorize your salespersons--as employees or independent contractors? If you have employees incorrectly treated as independent contractors, you open yourself up to potential liabilities, such as additional payroll taxes, interest and penalties. In this article, we will show you the advantages of having employees classified as statutory employees rather than independent contractors or common-law employees. We will also give you a glimpse of what President Clinton's proposed Health Security Act has in store for employers and independent contractors.
A statutory employee may be thought of as a "quasi independent contractor," or part employee and part independent contractor. The advantages in being classified as a stautory employee, rather than a "common-law" employee are:
1. A statutory employee reports income and expenses, as if he/she were a self-employed independent contractor--on Schedule C of Form 1040. The individual may deduct all expenses in full--without the 2 percent disallowance of such expenses if they were an itemized deduction on Schedule A.
2. The statutory employee is not subject to income tax withholding, and the employee's take-home pay increases. The employer must still deduct social security tax at normal employee rates from the employee's payment, and the employer must pay the other half of the social security tax. Although the employee must pay quarterly income tax estimated payments, such estimates are only based on the NET income reported on Schedule C after all expenses have been deducted.
3. Despite filing on Schedule C, the statutory employee is not liable for "self-employment tax," since social security tax has already been paid (one-half by withholding and the other half by the employer).
The IRS is notified that someone is a statutory employee by (a) the employer checking the appropriate box in Section 6 of Form W-2, and (b) the employee checking the statutory employee box on his Form 1040 Schedule C, Line 1 (the line that reports gross income). On that line the IRS has added this note: "Caution: If this income was reported to you on Form W-2 and the 'statutory employee' box on that form was checked ... check here."
BENEFITS TO EMPLOYERS
The employer can offer the sales/employee much higher take-home pay and an opportunity to file his/her tax return (and claim expenses)...