Employee - ENGAGE CPAs

When talking business, an employee and an independent/subcontractor are not synonyms and they should not be used interchangeably. These two classifications come with some very important distinctions in how that worker is paid, how much control you have over them, how they represent you and your business, and how much they cost you.
Per the IRS: You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it.
As an example, if you are showing up to a job in the office building that I rent, and you're under my control for the time period we've agreed upon, you're my employee. So, that makes me your boss. Nice to meet you! I'm Dave.
However, it's rarely ever so cut and dry, especially in tax and employment law, so the IRS uses the Common Law Test to outline three categories to consider when determining if a worker is an employee or a contractor. Those categories are Behavioral Control, Financial Control, and Relationship of the Parties. It's important to keep in mind that no one factor stands alone in the classification determination. You need to consider all three categories when deciding if the worker is an employee or contractor.
Behavioral Control: A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised.
Financial Control: Does the business have a right to direct or control the financial and business aspects of the worker's job? Who is paying for the worker's expenses? If you're paying for everything they need to do the job, they're likely an employee.
Relationship: The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes written contracts, benefits, permanency of the agreement and types of services they're providing the business. If they're greeting customers as they walk in the door, wearing a business uniform and have a business email address....they're probably an employee.
We'll talk more about examples that the IRS gives to help you determine if your worker is a contractor or an employee in the Advanced Business Information course.
So now what?
If they look like an employee, dress like an employee, and act like an employee, they're probably an employee. So if you just found out that you have an employee, you need to treat them as such. You should have an employment agreement, they should have set hours, a set salary or hourly wages, review periods where you analyze their performance. They should get on payroll immediately, which means you pay 1/2 of their social security and medicare taxes and they have federal taxes withheld from their paychecks before they receive it in their bank account, so that they don't owe as much at tax time. It's more expensive to you as the business because you're covering a portion of their taxes, but if it's the proper classification per the IRS, then you should adhere to the guidelines.
Once the employee is on payroll, they can participate in retirement savings, healthcare, and they'll be able to start building a foundation with your business. Happy employees make for less turnover, and less turnover leads to successful companies. The amount of effort and restarting that is put into finding and onboarding a new employee, especially at the small business level, is astounding. So any small business that can spend less time doing this, is a more successful business.
The last thing to check is your state's employment laws regarding worker's compensation coverage. Most states require worker's compensation coverage for employees, so you want to make sure you adhere to those guidelines as well should anything happen while your employees are on the job.
What to expect at Year-End?
In addition to the regular paystubs that your employees get from your payroll company when they're paid, at the end of the year employees will get a W-2 showing the total amount of wages they were paid and the total amount of taxes withheld. This is a requirement if you have W-2 employees because they need this form to be able to complete their individual tax return.
What happens if I just pay everyone as a 1099 worker/subcontractor?
Classifying an employee as an independent contractor with no reasonable basis for doing so makes employers liable for employment taxes. This means that if anyone finds out that you're doing this, your insurance company, state, or federal government, you'll be on the hook for the entire social security and medicare tax amounts owed on the amount you paid your subcontractors. That's 15.3%, on every subcontractor payment you made.