Sipping the bubbly, kisses at midnight, wispy resolutions—all mere memories come the first day of the calendar tax year. No one likes to file taxes except for zealous tax preparers who see the first four months of the year as their business boon time. For small to medium business owners, however, the start of tax season can be especially frightening. The rules of taxes for small businesses are as questionable as what’s going to happen on season 4 of Downton Abbey. Just as unfortunate, SMB owners who make mistakes, such as hiring freelance technical writers on payroll, can find their accounting books boiling in hot water by spring time.
Mistake #1: Freelancers Are Not Employees
Hiring freelancers for jobs ranging from writing web content to managing social media sites is a way for SMBs to cut costs while increasing efficiency. Freelancers are highly skilled in particular areas, such as web design, copywriting or graphics. Choosing these workers to fill much-needed jobs saves you money on payroll as you are typically hiring them based on what they produce rather than hourly. Therefore they are not employees and cannot be classified as such when it comes to filing taxes. Some businesses attempt to bypass the distinction between freelancers and employees. In order to be classified as a freelancer, the person in question should not:
- be evaluated for performance by the company
- be required to come into the office on a set schedule
- have no share of revenue
These stipulations indicate an employee according to Rapid Tax. If you are trying to skirt the law here in order to reduce your payroll taxes, expect for the IRS to take notice as this issue has become more common during the recession.
Mistake #2: Setting All Employees on Salary
By making it so that all of your employees are paid on salary, you are red flagging your SMB with the IRS. Employees who work in administrative or executive positions in a professional or management level position can earn a salary, which must be at least $455 per week. The reason why employers want to pay employees on salary is because the employees are then exempt from minimum wage and overtime compensation laws.
For example, a SMB employer running a printing press might hire someone to operate the press in addition to editing the copy. The issue here involves the gray area of administrative duties. While the employee might be in charge of the printing press, they are also involved in manual labor, as the latter here could disqualify them for administrative status. If you are going to set an employee to receive a salary, start with a written job description that details the specific job assignments given to the employee. Take this to your accountant for reassurance.
Mistake #3: Misdirecting Payroll Taxes
SMBs who have employees on their payroll must pay payroll taxes to the federal government. See mistake #1 to note that you shouldn’t classify employees as freelancers simply to avoid this issue. Mandatory payroll taxes include:
- Social Security
The amount of these deductions vary. Social Security taxes are determined by the Federal Insurance Contributions Act and the current rate according to the IRS is 12.4 percent total, split equally between the employer and the employee. Medicare taxes, like Social Security taxes, are set by the FICA. As of December 2013 this rate is 2.9 percent total, divided between employer and employee. Income tax is determined according to the filing status of an employee via the W-4 they fill out when they are hired.
The issue for SMBs when filing these payroll taxes is that, for a business that is just starting out, they may not have payroll set up separately from their general expenditures. Therefore, when it is time to pay the employer’s portion of the payroll taxes and submit this to the necessary government agencies, cash flow issues mean these taxes are not covered. Some of the affordable yet efficient payroll services on the market that are ideal for a SMB include:
Bouncing a check to the US government is not just bouncing a check. It is an illegal activity that indicates a business is not responsible with its taxes, which puts you on the outs with the IRS.
Miranda B is a freelance writer available on WriterAccess, a marketplace where clients and expert writers connect for assignments.