Failure to pay taxes is one of the biggest failures of a small business.
The best way to avoid it is by hiring a bookkeeper.
However, it’s important to know that there are various kinds of bookkeepers that can help manage your financial and tax records. There’s a difference when it comes to bookkeeping for independent contractors and employees.
Discover the crucial difference in this short guide that can help you avoid costly lawsuits and IRS penalties.
Bookkeeping for Independent Contractors
The IRS defines an independent contractor as someone who does work on projects or offers services on an as-needed service.
The independent contractor is free from the control of the person they work with. The independent contractor is their own boss, they set the guidelines, and offer a service that the business they work for doesn’t have.
Independent contractors also set their own schedules and wages. They determine the price of their services.
Bookkeepers need to remember to file 1099 for independent contractors, not a W-2, which is reserved for employees. Misfiling could result in more tax expenses and tax penalties.
You can check out our bookkeeping services by looking at our website and how we help businesses stay IRS compliant.
Bookkeeping for Employees
Bookkeeping for employees is very different than independent contractors.
With employees, you have to correctly take out taxes from their paycheck and you have to ensure that you offer health insurance.
Bookkeeping for employees is making sure taxes are withheld and you file a W-2 for the employee.
The business will also withhold social security and Medicare from the wages of the employee. With an independent contractor, they are in charge of setting aside taxes and putting aside social security and Medicare.
An employee is also protected by employee and labor laws found under federal regulation.
The employee is also paid hourly or with a salary. Independent contractors decide how much they want to earn by setting their own wages.
In addition, employees will be paid by a set schedule, which is either weekly, bi-weekly, or monthly. Independent contractors will send out an invoice in order to get paid.
Ultimately, a bookkeeper can help you understand the differences and assess how much you will save on your business if you hire an independent contractor or employee.
Why You Need to Know the Difference
You should know the difference when it comes to bookkeeping for independent contractors and employees, otherwise you might be paying a hefty IRS penalty. That’s why it’s important to figure out what services you need, and if it’s the work of someone you want to hire outside your company or bring someone onto the team.
It’s important to know these differences and hire a bookkeeper to help you understand them, so you don’t pay penalties. You also need to understand the role of an independent contractor and how they can help your business.
If you have more questions about the differences between an independent contractor and employee, contact us here.