Paying Workers ? What Can You Write-Off?

As your business grows, you are going to need help. This help comes in the form of employees and independent contractors. What you can write-off is dependent upon how your helper is classified ? as an employee or independent contractor.

Independent Contractor

Whenever possible, you want to use independent contractors to assist you. Payments to independent contractors are completely deductible. You simply claim the deduction on your return. If you pay them more than $600 during the tax year, you also must issue a 1099-MISC in January of the following year. Importantly, you do not have to pay employment taxes or make withholding on the compensation.

Unfortunately, the IRS doesn't allow you to randomly classify a worker as an independent contractor. The key to the determination is whether you "control" the actions of the worker. Generally, you must be able to show the IRS that the worker is an independent contractor because they have the ability to control the details and means by which the work is accomplished. To this end, it is helpful to show the worker sets their own ours, has a work place and risks not getting paid if the work is below standard.

Employee

If your worker is classified as an employee, the tax burden increases. Under federal law, you are responsible for paying employment taxes related to the worker, even if there is only one.

Initially, you must withhold FICA, Social Security and income taxes from employee paychecks. As an employer, you must also contribute FUTA payments on your own, to wit, they are not deducted from the employees pay.

FICA stands for the Federal Insurance Contribution Act. This Act created a system to collect and provide benefits for workers who retire, are injured or become disabled. FICA is better known as Medicare.

FUTA stands for the Federal Unemployment Tax Act. This Act created a system to provide unemployed workers with temporary benefits until they obtain a new job. The system works in tandem with state unemployment acts. Most consider it a disaster, but you still have to pay.

In Closing

As you can see, it is cheaper to use independent contractors versus employees. The tax burden is significantly less, but make sure the IRS doesn't reclassify them as employees.

Richard Chapo is with http://www.businesstaxrecovery.com - recovering overpaid taxes for small businesses. Visit our article page - http://www.businesstaxrecovery.com/articles - to read more tax articles.

---

Hurricane Katrina ? How To Use Your Business Loss To Get A Refund on 2004 Taxes

With the massive losses caused by Katrina, the economy of... Read More

Reducing Taxes Through Dividend-Salary Mix Calculations

Should I take wages or dividends from my privately owned... Read More

State Tax Information

All states also have their own tax system. Typically there... Read More

I Havent Filed a Tax Return with IRS in Years, What Do I Do?

In elementary school, kids come up with creative excuses why... Read More

Tax Tips for Home-Based Business Owners

As tax time approaches, many home-based business owners begin completing... Read More

Alas! In E-Commerce Taxland

In trying to comply with tax laws for your e-business,... Read More

IRS Obtains More Than 100 Injunctions Against Tax Scheme Promoters

The IRS has obtained civil injunctions against more than 100... Read More

Home Based Business Tax Deductions

Running a home based business reaps many wonderful tax deductions... Read More

Tax Reduction Tips

In the rush to get tax returns prepared and filed... Read More

The Annual Gift Tax Exclusion: Getting The Edge

Whether helping the kids with a down payment on their... Read More

Electronic Commerce Taxation and Pakistan

Assume a buyer in Pakistan downloads software from the Internet... Read More

Seven Key Tax Deductions for the Self Employed

As a sole proprietor, it's wise to familiarize yourself with... Read More

What to Do If You Can?t Pay Your Taxes

The end of tax filing extensions is quickly approaching. What... Read More

SFR Substitute for Returns: IRS Action on Non-Filers

In the latest Star Wars episode, the evil empire executes... Read More

Back To School ? Educators Deduct School Expenses

As teachers and students head back to school following a... Read More

How to Check the Status of Your Tax Refund Online

So, you were pleasantly surprised to learn that you are... Read More

How to Maximize Your Home Business Tax Deductions for 2005

Someone once said, 'the best way to calculate your taxes... Read More

Failure To Pay Employment Taxes ? Penalties

As an employer, you must pay employment taxes if you... Read More

Tax Trap #5 -- Ignoring The IRS (and the 5 best ways to contact them!)

We all love to criticize the IRS, don't we? And... Read More

Identity Theft ? Impacting Your Taxes?

If your identity is stolen, your finances can quickly become... Read More

Rental Property Tax Deductions

Own residential rental properties? This article discusses how income from... Read More

Income Tax Returns Your Accountant Should Not File

You've been feeling uneasy (perhaps even guilty) because you've failed... Read More

Euro Tax Haven Threat

Media reporting of a new EU savings tax directive has... Read More

Estate Taxes - It Pays to Plan Ahead

Estate taxes. It's not enough to simply know they exist,... Read More

Slash Tax when Buying a Business

When buying a business, how the "purchase price" is made... Read More

Tax Deduction for Alimony Payments? - Yes!

Over 50% of marriages end in divorce in the United... Read More

Another Tax Loophole

Just image, you are a small manufacturing company, business has... Read More

Fiscal Deity: Tax Consultant

Strategic planning throughout the year results in a minimal tax... Read More

Employment Taxes ? Depositing With The IRS

If your business has employees, you must pay employment taxes.... Read More

Small Business Tax Issues for Self-Employed Individuals

The United States is a nation of entrepreneurs. There are... Read More

Small Businesses Filing Amended Federal Tax Returns to Recover Money

Small Businesses Filing Amended Federal Tax Returns to... Read More

Car Donation: An Easy Way to Support Your Favorite Charity and Get a Tax Deduction

Most people look forward to getting their tax return, but... Read More

Tax Time Tune Up

Excerpted from the new book, "How to Do Space Age... Read More