I have seen more clients get in trouble with their business and the IRS because they did not pay their payroll taxes on time. It’s a tricky thing, because you do have some leeway in the timeliness of your payments, and so often business owners and managers make the decision to forego paying the taxes right away, thinking that they will catch up later. Then later never comes and before they know it, the IRS is after them. So what’s the best approach with payroll taxes?
First let’s talk about the difference between an employee and an independent contractor. Again, I have heard lots of folks say “we’ll just pay him contract”, then they don’t have to worry about payroll taxes. It’s true, independent contractors are responsible for paying their own payroll taxes. Just be sure this person meets the definition of independent contractor. If the person working for you does not fit the definition, they are an employee and as such you are required to pay payroll taxes on their behalf.
So here’s the distinction between an employee and independent contractor:
Employee – You control the job (what, where, when and how) and provide the employee with the tools and supplies to do the work.
Independent contractor – The contractor controls the job (what, where, when and how) and provides his own tools and supplies (or may charge you for supplies as part of his contract).
Let’s look at some examples:
You hire your friend’s brother to install lighting in your grow space. He tells you when he can do it, brings his own tools, but charges you for the actual lights.
One of your budtenders agrees to clean and polish your dispensary floors on Sunday evening after closing. You provide the equipment and supplies and pay him a flat fee for that service.
The first example is an independent contractor because you don’t control when the he does the work, you don’t provide the tools, and you are technically not his boss. You only approve the result when it is complete.
The second example may seem like an independent contractor because it is not the budtender’s regular job and the work is done after hours. However, as long as you are directing the work, providing the supplies and equipment and requiring the work to be done on your schedule, that person is an employee regardless of whether or not the work is part of their regular duties.
You are not required to withhold payroll taxes for independent contractors. There is reporting required if you pay them more than $600 in a calendar year, but otherwise you have no tax related obligations. Conversely, if you employ staff you are required to withhold social security tax, Medicare tax, federal income tax and possibly state and local income taxes from their wages. Your best bet to make sure taxes are withheld appropriately is to use a software or an outside service to process your payroll. As an employer you have an obligation to pay taxes in addition to what is withheld from your employees. To sum it up, you are required to remit:
- Social security, Medicare, federal income tax and state income tax withheld from an employee’s wages (employee portion)
- Social security and Medicare tax matching the employee’s withholding up to certain limits (employer portion)
- Federal and state unemployment tax charged only to the employer
You have a certain amount of time in which to pay these taxes, it could be as much as a month or as little as a couple of days. Here is my recommendation though and you should never vary from this. Pay the social security, Medicare, (employee and employer portions), plus federal and state withholding with every single pay period. It is the only way to assure that you don’t spend the money you have withheld from employees and be subject to severe penalties. Don’t be tempted to hold onto the taxes for a while, thinking that you will deposit them later, even if cash is tight. It almost always backfires and you will find yourself in a severe situation with the IRS.
Many software systems will calculate payroll for you and pay the taxes by drafting your bank account at the appropriate time. Using an outside payroll service will also assure that your taxes are paid on time. Whether you use an outside service or prefer to do it in-house is a management decision, but make it easy on yourself and pay the taxes immediately. That way you are never tempted to use your tax money for operational purposes.
Last comment is this. If you are working strictly in cash because you cannot or have not gotten a bank account, nothing changes with tax deposit requirements. In fact, you will have to find an IRS location that will take cash, make an appointment to deliver the cash deposit to them, then pay a penalty for not paying through a bank account. If this is your situation, you may be better off paying an outside service to process payroll for you.
Payroll taxes are easy if you deposit them each pay period. For the sake of your business viability, don’t mess around with this one.