I have a small jewelry business that employs less than five people
(one full-time and the rest are part-timers). Do I have to give
them W-2’s? Sometimes they want to get paid by merchandise and
deducted from their pay. Some of the workers that have worked for
me is sporadic and/or seasonal. Am I asking for trouble by letting
them get paid by merchandise, tools, supplies, etc.? Should I just
pay them their wage and then when they want to buy something, sell
it to them as a regular sell? Thanks, Dolphin
Sounds like what you are into is bartering. It’s not a bad thing,
but one that is hard to document, and requires additional IRS forms
to fill out. It also might cause you some problems with the state
sales tax folks.
I’m not a tax expert, but it would seem to me that giving goods for
salary would be a problems in that you could only deduct the cost of
the goods as and expense rather than the retail value that you are
trading for time worked. A second though is that you might also be
running into trouble with S.S. issues and tax withholding issues. I
would strongly advise a trip to your CPA for advise. As a friend
used to say, “The number one rule on holes is that when you are
standing in one, quit shoveling”. Sounds to me like you might be up
to your neck and still digging. Get some professional advise, not
from jewelers, but tax people.
Don
Man, do you ever need help!
Firstly you should be taking taxes out of their pay, passing those
taxes along to the government. Then yes of course you issue W-2’s,
which were to be given out by Jan 31st for last years wages.
Don’t so sub contractor stuff. The IRS has stern rules about that
you have to take out taxes.
On merchandise, it’s a deduction. You pay them $100, they buy a $25
ring, looks like this:
Gross Pay: $100
Taxes: -$30
Net pay $70
Less merchandise -$25
Net take home pay $45
My suggestion, use a payroll service. Go to www.paychexs.com and look
at using an outside payroll service. They issue the checks from what
you say you owe them and pay the taxes for you.
Best way to go.
If you’re thinking of deducting the $25 from the $100, then TAXING
the remaining $75, you can, but it’s not legal. Tick’m off and if
they turn you in, you’re toast.
David Geller
Unless your employees earn less than $400 per year, you have to give
them either a W-2 or a 1099. W-2s are for regular employees who
receive hourly wages or a salary, and for whom you withhold taxes.
(You are withholding taxes, right? If they are regular employees, you
must do this even if they are seasonal.)
The 1099 is for independent contractors, who pay their own taxes,
their own bills, and their own social security tax. The IRS has a
pretty stiff test for who is an independent contractor, and does not
generally look kindly on those who claim their employees are really
independent contractors when they clearly are not. Basically, they’re
only independent contractors if they come and go as they please, do
their own work in their own way (with minimal input from you), and
are not told how, where, or when to work.
If you don’t already have an accountant, I would suggest you get
one. If you have employees, you have lots of financial and tax things
that MUST be done correctly – or the IRS will be very unhappy with
you. An accountant can advise you on these.
Suzanne
Suzanne Wade
Writer/Editor
Phone: (508) 339-7366
Fax: (928) 563-8255
@Suzanne_Wade1
http://www.rswade.net
Hello Dolphin, Re: your question about providing W-2s to your
employees. I do think you are playing with fire here. If you are big
enough to have employees, you are big enough to have an accountant
to answer these questions. Get one soon.
Briefly, U.S. law entitles your employees to social security, which
you withhold and match (unless that person is a dependent). You
also have to withhold income tax; all withholdings must be sent to
Uncle Sam and the state in a timely manner. The W-2 is a report of
all these figures for income tax preparation. Should an employee be
audited, the lack of proper records and tax collection and
submission will reflect on the employer… YOU.
Wasn't Al Capone finally convicted on income tax evasion, not
racketeering? Not a laughing matter. Judy in Kansas
Hi Dolphin, US Tax regs are that anyone who gets paid more than $600
per year by you must get a W-2 or 1099 (depending on their employment
status with you).
If your employees want to take their pay in merchandise, that’s
fine… but you still have to account for it like it were cash. That
means that if they earn $1000, you must pay SSI, FICA, state, local
and Federal taxes on their behalf on that $1000. The remaining $$
can be applied as they see fit (and as you wish to allow them to)
toward merchandise purchases from your business. To protect
yourself, you need to have stated and equally-applied employee
purchase regulations – the amount of the discount (if any) that you
offer off of your retail price, or the multiplier of the cost of the
item must be consistently applied to all employees, and should be a
written policy.
Basically, you account for it like this. They work, they earn $$,
issued to them in a paycheck. On that paycheck, you take the
required tax and other deductions, then can take deductions for their
purchases on the stub. If there is any left over, they get that in
the check. If there is none left over, you show the balance as $0 on
the check. If they owe you at the end of the pay period, you show a
negative balance on the check stub, and carry that balance over to
the next pay period.
Of course, it’s easier from YOUR point of view to just pay them the
check, then have them buy what they want. But that part’s up to you.
Karen Goeller
@Karen_Goeller
http://www.nolimitations.com
Handcrafted and Unique Artisan Jewelry
Dolphin, This depends on how much time a year they work for you. I
have what is considered a full time employee, but she is paid on a
W9 by contract as a 1099. As my accountant explained it to me, the
IRS looks for a few things. 1) if the principals of the company are
making a salary in excessive amounts to their contract employees; 2)
does the contract have specific start and ending date and 3) what is
the contract employee’s title? I subcontract my help and pay their
salary like I would pay a vendor. This gives them the opportunity
to take their own tax deductions and take on other jobs if they need
to. We have been operating in this mode for quite awhile, and it
works very well for us.
Hope this helps.
-karen
Karen Christians
M E T A L W E R X
10 Walnut St., Woburn MA 01801
Ph. 781 937 3532, Fx. 781 937 3955
http://www.metalwerx.com/
Jewelry/Metalarts School & Cooperative Studio
Board Member for the Society of North American Goldsmiths
US Tax regs are that anyone who works for you and gets paid more
than $600 per year by you must get a W-2 or 1099 (depending on their
employment status with you).
If your employees want to take their pay in merchandise, that’s
fine… but you still have to account for it like it were cash. That
means that if they earn $1000, you must pay SSI, FICA, state, local
and Federal taxes on their behalf on that $1000. The remaining $$
can be applied as they see fit (and as you wish to allow them to)
toward merchandise purchases from your business. To protect
yourself, you need to have stated and equally-applied employee
purchase regulations – the amount of the discount (if any) that you
offer off of your retail price, or the multiplier of the cost of the
item must be consistently applied to all employees, and should be a
written policy.
Basically, you account for it like this. They work, they earn $$,
issued to them in a paycheck. On that paycheck, you take the
required tax and other deductions, then can take deductions for their
purchases on the stub. If there is any left over, they get that in
the check. If there is none left over, you show the balance as $0 on
the check. If they owe you at the end of the pay period, you show a
negative balance on the check stub, and carry that balance over to
the next pay period.
Of course, it’s easier from YOUR point of view to just pay them the
check, then have them buy what they want. But that part’s up to you.
The only other way to handle it is to have your “employees” actually
be “vendors” – they would have their own businesses, in essence, and
you would be paying them by the job (not by the hour) as you do any
other vendor. But in this case, you would still have to account for
your “outgoing inventory” as payments to a vendor, and they would
have to account for their “incoming inventory” as taxable income.
This could lead to a nasty quagmire, and would require scrupulous
record-keeping on your part to ensure that the IRS doesn’t at some
point in the future decide that they were really employees and not
vendors. At that point, you could find yourself owing back taxes,
penalties, and back benefits to the employees. I don’t think this
is a great way to go for most of us!
Karen Goeller
@Karen_Goeller
http://www.nolimitations.com
Handcrafted and Unique Artisan Jewelry
With all this fancy dancing, and zigging and zagging trying to
understand the IRS “rules of engagement”, it sounds to me like we all
need to get on the band wagon for some tax reform in this country so
we can get a system we can understand. No one, not even the IRS
employees can give a difinitive answer to most tax questions. So, I
suggest everyone take a look at http://www.taxreform.com/. A lot of
my time and dollars are wasted trying to satisfy this monster. It’s
time for a change.
I subcontract my help and pay their salary like I would pay a vendor. This gives them the opportunity to take their own tax deductions and take on other jobs if they need to. We have been operating in this mode for quite awhile, and it works very well for us.
This issue of independent contractors, contract employees, and
regular employees is not something to be taken lightly. There are
many pit falls with making the decision of which is which. From my
days in corporate America during the downsizing of the early 90’s,
we got bit a couple times by hiring someone as an “independent
contractor” and then finding out that by the rules, they were a
regular employee and subject to all the rules, including
unemployment when they were terminated at the end of their term.
Basically, an independent contractor is one who is hired to perform
a task. You can give no work direction, or “manage” the person.
You can only hire them to do a specific task, and they are
responsible for how and when to do it. All they have to do is do
what you ask them to do and finish by a set date. If you intervene
in any of these steps, they become your employee and are subject to
all the rules that apply. IE you send a ring to a wholesale jeweler
for repair or sizing. You tell them that you want it sized up to a
7 1/2, and that three tips need repairing. They take the job to
their shop and do it. You pay for the job. You have hired an
Independent Contractor. If you tell that person that you want them
to work exclusively for you, and be available Mon to Fri between
8am and 5pm and you want to tell them which solder to use, and how
to finish the joint, they just became your employee. You are now
giving work direction.
A Contracted Employee is usually hired from an agency. The agency
is responsible for managing the employee. Again, you are
contracting a task to be performed, and you can not manage the
individual, that is the responsibility of the agency you hired to do
the job. This employee may work at your location, and use your
equipment, but again, the agency is responsible for the employee.
Any issues with quality of work, or other employee/employer issues,
have to be address between the agency an the employee, You can only
“fire” the agency or require them to provide another worker. If you
have set up a contract with a person directly, then that person
falls into the Independent contractor class unless you provide work
direction. Then they are your employee.
There are a lot of tax issues, as well as other HR issues here. For
the small shop, if you have someone working for you, in your shop,
they are your employee. If you are leasing out a part of your shop
to an independent contractor, you can not prevent that contractor
from doing work for other people, even if you are providing the
equipment. It gets very sticky. Getting caught doing something
wrong can result in a lot of problems for you beyond having to stop
doing what was wrong. IE the unemployment issues. You may be
responsible for paying the employers share of the state unemployment
taxes and possibly penalties for taxes not paid. You may also get
bit because you didn’t withhold income tax and social security
taxes, and depending on the state, there might be other issues.
One more interesting thing here. This applies to your children and
friends who “help out” now and then as well. They can become your
employees.
As said in most of the other post on this subject, good professional
advice from your CPA should be followed. If you don’t have one, get
one.
Don