Introduction:
As a contractor, you may have to deal with a payroll department that is unfamiliar with the ins and outs of managing someone who is self-employed. Self-employment is not as easy as it may seem and can be complicated in certain cases, especially if you are not being paid for your work. This article will provide insight into how to properly handle payroll for contractors. Understanding the different terms and concepts involved can help you to effectively communicate with the payroll department.
Payroll is a very important service that many businesses offer. Employees work for the company and are typically paid a set wage that they earn through their work. When employees have paydays, they are usually paid in one lump sum on a regular basis. When contractors are hired, they generally do not receive an annual wage and are instead paid as time is consumed, usually weekly or bi-weekly. The way that payroll is handled varies widely among different companies, so it’s very important to understand what the options are before you sign up with a new contractor.
What is Contractor Payroll Management?
Contractor Payroll Management is the process of taking in a set wage and distributing it out to the employees that you have on staff. Payroll is not just limited to those who are being paid by your business, though. If a contractor pays himself directly, he will have to be responsible for his own payroll as well.
When you hire a contractor, there are several options available to you. You can hire contractors as employees (as many companies do) or pay them as independent contractors (as many self-employed contractors do).
Employees are employees of your company and receive an annual wage so they can purchase insurance, holiday bonuses and other perks that their jobs normally offer when they work at a traditional company. Employees are generally given some sort of a retirement plan and are also eligible for time off. You will have to pay into their taxes as well as the contractor’s, although the amount is usually split across both of you.
Independent contractors are responsible for their own taxes, so you won’t have to worry about that aspect of the job. They are also given an annual wage that they can spend however they want and can include bonuses, retirement plans, insurance and any other benefits that they choose to add in on their own.
Contractors As Employees:
When a contractor is hired by your company as an employee, you will be responsible for all aspects of the payroll process. This may be a large task, especially if you hire a large number of contractors. You will need to provide all of their forms, remit them their taxes and handle payroll information that they need.
Contractors As Independent Contractors:
Contractors who choose to handle their own payrolls are self-employed and are responsible for all aspects of the process. This means that they will be responsible for keeping track of their own taxes and notifying your company when they are due as well as paying into social security and similar programs for themselves. They must also pay into other programs that pay out when someone dies or retires.
The money that they earn will generally be sent directly to them. This means that you will not be able to benefit from the money that they earn and their taxes must be sent in by their own deadlines. They must also handle all of the paperwork involved in the process, including forms and remittance.
Using independent contractors does save your company money as you are not responsible for handling any of their paperwork or taxes, but it can provide a hard time for an employee who has never handled payroll before.
The differences between Contractor Payroll Management vs employees can usually be seen from both sides where benefits are concerned.
The Ins and Outs:
1) Filing:
When your contractors are employees, you will be responsible for filing their taxes for them. You will have to handle any forms that they need and provide them with copies of their 1099s and W2s. Filing their taxes is a complicated task and must be done by the deadline or else the contractor could face huge penalties from the IRS. You will also have to pay into social security on your contractors’ behalf, although this will hopefully be returned to them when they retire (and is taken out of their payment).
When a contractor is self-employed, he is responsible for his own taxes.
2) Payroll Administration:
When a contractor is hired as an employee, it is your responsibility to handle all of the paperwork involved in their payroll. You will also have to pay into any retirement plans that they need and for any other benefits that you offer. This is typically done through payroll software, but there are many options available and it varies by company.
When an employee hires a contractor to do work on his company’s premises, he will generally be responsible for paying him directly. This means they will pay the contractor every couple weeks or so and have to keep track of their payment method when they need to file their taxes with the IRS.
3) Taxe Administration:
When a contractor is self-employed, he must handle all of his own taxes. This will include filing them in a timely manner, paying into social security and any other taxes that you would normally as an employee. The IRS has several forms available for contractors to fill out to file their tax returns, which can be seen here .
The biggest differences between the two usually revolve around the way that you handle bonuses and benefits. When getting new employees, you will almost always want to offer bonuses for a few months with this being one of the first things that they will see if they are hired. However it is likely that there will be some sort of legal complication with offering these bonuses to contractors who are not employees.
Conclusion:
The differences that exist between employees and contractors are often hard to see, but the legal implications are extremely important. You may get away with paying someone as an employee who is technically a contractor, but don’t count on getting away with it. You will also have to make sure that you’re filing all of the correct forms and paying into the correct accounts as well.
Contractors can definitely be useful members of your team if you know what you’re doing, but dealing with payroll can be a headache if you don’t know what you’re doing. Make sure that one of your employees takes responsibility for handling these issues before they become important problems for your company.
