Page 135 - Essentials of Payroll: Management and Accounting

ESSENTIALS of Payr oll: Management and Accounting
tax purposes. The chapter finishes with coverage of several forms used
to report employee and supplier income to the government.

Employee or Contractor Status

A key compensation issue is whether someone is an employee or a con-
tractor, since the reporting of income to the IRS varies considerably for
each one, as do the tax withholding requirements of the employer. The
defining criteria that establishes a person as an employee is when the
company controls not only the types of work done by the person, but
also how the work is done. An employer also controls the type of work
done by a contractor, but not how the work is done. Other supporting

evidence that defines an individual as a contractor is the presence of a
contract between the parties; whether the contractor provides similar
services to other clients;and whether the contractor is paid based on the
completion of specific tasks, rather than on the passage of time.
An employer may be tempted to categorize employees as contractors
even when it knows this is not the case, since the employer can avoid
matching some payroll taxes by doing so. However, taking this approach
leaves an employer liable for all the federal income, Social Security, and
Medicare taxes that should have been withheld. Consequently, strict

adherence to the rules governing the definition of an employee and
contractor should be followed at all times.

Wage Exemption Guidelines
You should be aware of the general rules governing whether an
employee is entitled to an hourly wage or a salary, since this can avoid

complaints from employees who wish to switch their status from one to
the other. The key guidelines for designating a person as being eligible
for a salary are as follows:

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