Knowing when to use the distinction of Employee vs Sub Contractor can be a tricky call for most businesses.
If you pay someone to do work for you but not on your payroll; IE; accounting professional, legal team, (if you have a question just send me the specifics and I can make the determination on an as needed basis for you.) you must comply with the IRS standards and have them fill out a W9. Basically if a person is free to work for someone else and just provide services too you as well as others they are a W9 sub contractor. However if you control their hours and they work under your direct supervision they are employees and you must comply with the W2 distinction and put them on payroll. Along with them being on payroll of course that means you withhold appropriate taxes and pay employee / employer taxes on their behalf. I don't offer payroll services but can refer you to ones that do and help get it all setup for your business.
Also if you collect funds for the services that your contractors provide on behalf of your business and you pay them tips that have been paid on a credit card you must report those tips as well on a 1099-Misc year end form. Not complying with this can and w\usually will result in harsh fines and penalties from the IRS as well as a loss of business deductions. I know it's never a popular decision to tell a sub contractor who is getting paid cash from you that they need to provide you with tax documents but this is YOUR business not theirs. If they don't want to com,ply then you should find other people that will.
If you hire employees there is information that you need to secure for your records and forms that you must complete.
Eligibility to Work in the United States
You must verify that each new employee is legally eligible to work in the United States. Have the employees you hire fill out Form I-9, Employment Eligibility Verification (PDF).
Employee's Social Security Number (SSN)
You are required to get each employee's name and Social Security Number (SSN) and to enter them on Form W-2. (This requirement also applies to resident and nonresident alien employees.) You should ask your employee to show you his or her social security card. The employee may show the card if it is available. You may, but are not required to, photocopy the social security card if the employee provides it. Record each new employee's name and social security number from his or her social security card. Any employee without a social security card should apply for one using Form SS-5, Application for Social Security Card (PDF). The Social Security Administration (SSA) offers social security number (SSN) verification and quick access to relevant forms and publications.
Do not accept an ITIN in place of an SSN for employee identification or for work. An ITIN is only available to resident and nonresident aliens who are not eligible for U.S. employment and need identification for other tax purposes. You can identify an ITIN because it is a 9-digit number, beginning with the number "9" and is formatted like an SSN (NNN-NN-NNN).
Note: An individual with an ITIN who later becomes eligible to work in the United States must obtain an SSN.
Employee's Withholding
To know how much income tax to withhold from employees' wages, you should have a Form W-4, Employee's Withholding Allowance Certificate (PDF), on file for each employee. Ask all new employees to give you a signed Form W-4 when they start work. Make the form effective with the first wage payment. If employees claim exemption from income tax withholding, they must indicate this on their W-4. The amount of income tax withholding must be based on filing status and withholding allowances as indicated on the form. If a new employee does not give you a completed Form W-4, withhold tax as if he or she is single, with no withholding allowances. Additional withholding may be required on wages paid to non-resident aliens.
A Form W-4 remains in effect until the employee gives you a new one. If employees claim exemption from income tax withholding, they must give you a new Form W-4 each year. If an employee gives you a Form W-4 that replaces an existing Form W-4, begin withholding no later than the start of the first payroll period ending on, or after the 30th day, from the date you received the replacement Form W-4. For exceptions and invalid Forms W-4, refer to Publication 15 Circular E, Employer's Tax Guide.
You may also refer your employees to the withholding allowance calculator. Remember that this application is to help employees to ensure that they do not have too much or too little income tax withheld from their pay. It is not a replacement for Form W-4, but most people will find it more accurate and easier to use than the worksheets that accompany Form W-4. They may use the results of this program to help them complete a new Form W-4, which they will submit to their employer. Special rules may apply to agricultural employers. For more information, please refer to Publication 51 Circular A, Agricultural Employer's Tax Guide.
