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Verifying employee data
Since you are required to withhold payroll and non-payroll taxes for all of your employees, it's important that you distinguish all employees from non-employees.
The IRS defines an employee as someone who performs services for you and you can decide what service is provided and how it is provided.
You may refer to an employee as an agent or independent contractor. Nevertheless, if you think the IRS definition applies, you should err on the side of caution and withhold payroll and non-payroll taxes.
Before you even determine who is and is not an employee by this definition, you will want to verify they are eligible to work for you. The U.S. Immigration and Naturalization Service (INS) requires all new employees to complete INS Form I-9: "Employment Eligibility Verification."
You will also want all new employees to provide you with their Social Security Number (SSN). If they do not have one, they can register with the U.S. Social Security Administration (SSA) using Form SS-5.
All new employees must complete IRS Form W-4, which indicates how much you will withhold from income. The W-4 is your guideline for withholding income. The W-4 is also used to determine withholding for former employees who receive unemployment-compensation benefits.
If you make payments of $600 or more in a year to a worker that you do not consider an employee, the IRS requires you to file IRS Form 1099-MISC. The 1099-MISC can be used to substantiate any later claims of yours that a worker is not a bona fide employee.
Determining who is and isn't an employee is an important task. If the IRS overrules your treatment of an employee as a non-employee, you will be liable for that worker's share of FICA and income taxes.
Wages and compensation that you pay to employees are reported on IRS Form W-2. You are required to mail a W-2 to every employee by Jan. 31 for the tax year just ended. Income that you report on a W-2 must be added to your quarterly filings of
Form 941.
For additional information on withholding payroll taxes for different categories of employees, including family employees, see IRS Pub. 15.
Finally, if an unresolved tax issue with the IRS plagues your payroll operations, you should contact the Taxpayer Advocate, an IRS-sponsored, independent service that helps to arbitrate these kinds of problems and that protects your rights as a taxpayer.
Next Topic: Making estimated payments
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