Should small business owners who have “employees” that are contract workers ever consider using a payroll services provider? I have been wondering that for a long time because, after all, the employers don’t pay payroll taxes for contracted labor. So why would it ever be a benefit to outsource payroll of that kind?
She explained that even though employers don’t collect or pay payroll taxes on behalf of contracted workers, they still must issue a Form 1099 at the end of the year with a copy submitted to the IRS and appropriate state agencies.
That means that accurate and complete records have to be kept on how much was paid to the workers. An IRS Form w-9 is required to be on file. The contracted workers are responsible for any regular deposits that they must pay monthly or quarterly, but at the end of the year, that form 1099 has to be in their mailbox by a certain date – just like the W-2s have to be sent for employees.
Another consideration is that even though a worker is classified a contract employee, for a small business, the money paid to them is an expense akin to payroll and must be accounted for in that manner for the balance sheet and profit and loss statements.
The biggest problem is worker misclassification
Teresa reminded me that the biggest problem small business owners face is that often they would like to classify contract workers according to what they feel is best for their business. It does not work that way. There is a very specific definition for a contract worker with very precise criteria issued by the IRS. Employers do not get to determine whether a worker is an employee or not. The way workers are assigned work, requirements and demands put on them, how they do the work and what they are supplied to do the work are all considered when determining how to classify a worker. Misclassification can result in hefty fines and penalties. So it’s important to be sure workers are properly classified.
While employment and jobs can be managed in different ways, the end result is that it all must be properly classified, documented, accounted for, paid accordingly and, finally, reported accurately. Just like a payroll provider keeps track of employees and all the payroll-related taxes, expenses and reporting, the same has to occur for contracted workers.
The answer to my question is a resounding, “Yes!” A payroll service like The Payroll Department would be as apt to work with small business employers with only contracted workers as it would be to work with a small business with workers classified as employees. It comes down to an expert providing the services employers need to stay in compliance with federal and state regulations and laws.
I guess it is simple.
-Elaine of The Payroll Department Blog Team