Page 197 - Essentials of Payroll: Management and Accounting

ESSENTIALS of Payr oll: Management and Accounting
Definition of an Employee
The definition of an employee is extremely important to a business,since
it directly impacts whether taxes are to be withheld from a person’s pay,
which also must be matched in some cases by the business.The basic rule
is that a person doing work for a company is an employee if the employer

controls both the person’s work output and also the manner in which the
work is performed.The second part of the definition is crucial, since the
first part could also define a contractor who can choose to produce a
deliverable for a company in any manner he or she chooses.This defini-
tion identifies two classes of workers:
• Employee. An employee is paid through the payroll system; the
employing business is responsible for withholding taxes and
paying matching tax amounts where applicable.
• Contractor. A contractor is paid through the accounts payable
system; the business that uses the contractor’s services is only
responsible for issuing a Form 1099 at the end of the calendar
year to both the IRS and contractor, stating the total amount
paid to the contractor during the year. The contractor is liable
for remitting all payroll taxes to the government.
If a company incorrectly defines an employee as a contractor, it may
be liable for all payroll taxes that should have been withheld from that
person’s pay. Consequently, when in doubt as to the proper definition of
a worker, it is safer from a payroll tax law perspective to assume that the
person is an employee.

W-4 Form
When an employee is hired, he or she is required by law to fill out a W-4
form, which can be done either on paper or in an electronic format.An
employee uses this form to notify the payroll staff of his or her marital
status and the number of allowances to be taken; this information has a

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