 In this presentation, we will take a look at new employee tax forms and the concept of a contractor versus an employee relationship. Whenever we have a new employee, the tax form typically that needs to be filled out by that employee will be a W4. The W4 form looks like a straightforward form. It is a straightforward form, but it is a bit more complex and it's very important when recording the information for the employee to get the proper withholding. It's also a form that the payroll department within a company can't really give as much guidance with as a lot of employees would hope because the payroll department can't typically give tax advice. So even though the employer in other words is required to withhold the employee taxes for federal income taxes, they're not able to give the kind of advice that would be considered tax advice because the reporting of the income taxes in terms of the 1040 is really the responsibility of the employee. So in other words, the reporting of the W4 is going to deal with exemption amounts and how much is going to be withheld from an employee paychecks for federal income tax, their federal income tax. And then the employee, that means it's going to be related to the tax filing at the end of the year by the employee using the form 1040. So the W4, the withholdings, and your reporting of the 1040, our employees reporting of the 1040 at the end of the year are going to have a relationship to each other. We also have some other important data from the W4. So whenever considering the W4 when entering data into our payroll system, the W4 is often the form that we're going to use if we're going to enter data into our database system about a new employee, we can typically get a lot of that information from the W4. Now the W4 is a IRS form, it's a federal form, you're going to get it, you could find this copy to get a current IRS W4 form from irs.gov. You type in W4, you can find a current copy of W4 form as well as instructions for the W4 form and see how it all fits together and how it's going to be worked out. Note, I also didn't include the worksheet that it will typically be here that will help with the calculation for how many exemptions we have. So I'll talk about that more in a bit. This is just going to be the reporting form. So the W4, when we're entering data for a new employee, this of course has the first name and middle initial, the last name, it's going to have the social security number, which we're going to need to put into our database system, it's going to have the full address, which we're going to need to put into our system, it's going to have the marital status. And again, you might be thinking, well, why do I have a marital status? And that is going to feed into the calculation for the federal income taxes. You'll note that when you file your form 1040, which again is related to this form, that you have to say whether you're married or single or head of household or widowed. And the reason for that, of course, is that there's different tax rates. And so when we do the withholdings, because of that complication, we have to know the marital status. So it could be single, married, or married, but without a higher single rate. And so the reason for this third option is the fact that when we combine incomes together, it can confuse things, of course. So if we only had one employee making income, then that's usually what the tax system was first designed to do, meaning most houses used to be single income houses. And therefore, if you worked for a company, and you were the only wage earner for that company, then we could pretty accurately calculate your withholdings based on whether you're single or married. And that'd be it. But when you have multiple different types of wages that are going into the home, as well as different sources of income, then that really complicates the matter in terms of what the withholdings should be. So long story short, if we select the married but with a higher single rate, we're basically saying, yeah, we're married, but we want you to withhold at the higher single rate. Because if we were single, we would be paying a higher tax rate than if married because we typically have double income if married and therefore lower rates. Why would we do that? Because the higher the withholdings we have, the lower, you know, the more likely we'll get a refund at the end of the year or the more payment we'll be making towards the 1040. And if we have someone else that is working within the household, another spouse working within the household, then we may have higher rates that we need to be calculating at because our income combined will be at a higher rate. So and then and then, of course, we have if your last name differs, then we have the total number of allowances that we're claiming. Now this has a kind of a loose relationship to the number of exemptions you're recording on the on the 1040, meaning if we're single, we have at least ourselves as an exemption. If we are married, we have ourselves and our spouse as an exemption for married filing joint. If we are having dependents, children, for example, types of dependents, then we would have ourselves or our spouse and our child or children as exemptions. Now the allowances are not exactly the same as exemptions. Those are going to be part of the calculation. And this would be the information if we looked at the at the more comprehensive types of calculation for the W for to try to come up with this this number number five will take into consideration these exemptions in this calculation. But just note there's a relationship there. Why are we doing this? Why do we need this? Because we're trying to figure out based on the complex individual tax system, what the withholdings will be so that usually we want the withholdings to just barely be more than what the tax obligation would be, meaning, you know, the tax system is designed to hopefully try to make the employer take from the employee a little bit more than they're going to actually owe for income taxes, which they will then realize once they do their income taxes with 1040 at the end of the year. And therefore, they're going to get a refund. Why would it be set up that way? Because then the then the government is most likely to get paid. The government is most likely to get paid by the employer doing the calculation withholding the proper amount withholding a little bit more than is actually going to be owed. And therefore, at the end of the time period, the IRS will give the difference back, they'd rather give the difference back than have the employee owing money at the end of the year knowing that it's much harder to collect for the IRS. If the if the individual owes money at the end of the year and the IRS would also have the money sooner rather than later. So for those couple reasons that the system is designed for that format. So they're they're related. And this is going to be the line that will help us to get those exemptions. Now, we also have this this line additional amount, if any, you want withheld from the paycheck. Why would you want an additional withheld from the paycheck? That's going to be less income or less paycheck. And the reason is that that's basically saying, hey, you know, if we do a tax estimate with our tax professional, we might just come up with a number and say, I want to add more. Why? Because possibly we have other income sources, and that's going to push us into a higher tax bracket. And therefore, our withholdings from this W for will not be sufficient to pay for our taxes. Or we have a spouse, which would be part of our other income who has substantial income, and therefore pushing us into a higher tax bracket. And therefore the withholdings from this calculation will not be sufficient. We would need to increase it. And then we have a seven I claim exemption from withholding for 2008. And I certify that I meet both the following conditions. So we could try to say, you know what, I don't I don't need withholding. You don't need to withhold from me. And you have to basically tell the employer, the employer having the responsibility to withhold needs to needs to have a reason not to withhold. And that would be last year, I had a I had a right to a refund for all federal income taxes withheld because I had no tax liability. So you're basically saying, Hey, last year, you know, I didn't have any taxes. So the IRS is going to say, well, if that's a condition, your taxes are probably pretty low. And maybe you don't have a responsibility to pay if you're under a certain threshold, then you probably won't have any taxes because you won't be over the the standard deduction. And if you weren't over last year, then maybe you won't be this year. So and the other this year, I expect a refund for all federal income taxes withheld because I expect to have no tax liability. So again, if you're if your taxes are if your income is under a certain level under, like under the standard deduction, then you're not going to have any taxes typically. And you can basically claim that you can say, okay, I don't have any withholding under that specific scenario. And then of course, we need the first date of employment and the employer identification number as we need on every type of payroll tax form, and the employer name and address. So then we have this concept between the employee and a contractor. And this is a huge kind of concept because there's pros and cons to having a contractor relationship to an employee employer relationship. So if we if we're trying to find work, we need someone to do something for us, and we're trying to hire out someone to do someone for us, our choices are to hire them as an employee, or hire them as a contractor. Now at one point in time, this relationship might not might have been more kind of foggy than it is now, right, at least from a legal standpoint, from reporting standpoint, we want to have a very definite line. Prior to this, we might have hired someone and said, hey, we're going to pay you so much at the end of the week. And it is what it is. You know, I don't care what we call you if you're employer employee or a contractor. But now that of course, as an employee, the employer, the company, the employer has responsibilities to do things such as withhold and other responsibilities in terms of legal responsibilities over and for their employees, more responsibilities than they would have over, say, a contractor, a contractor who basically is running their own business. So if someone's a contractor, you're just paying them whatever they invoice you in essence. Whereas if they're an employee, then you have more legal responsibility, you have to withhold, you got to report all the reporting. So of course, one of the disadvantages when making this determination as to whether an employee is an employee or a contractor, we often have businesses that might want to lean towards contractors sometimes, because that would mean that they're not responsible for many of the legal responsibilities, such as reporting, withholding, and a lot of the other type of requirements, paying payroll taxes and some of that stuff that would be so it could cost. Now, the advantages of being an employee is, of course, you have a bit more control over the behavior of the employee, and you're able to take care of them more. In some cases, you're able to provide them with benefits, something like 401k plan, which could entice better people to work there. So those are going to be kind of like the pros and cons, some pros and cons between a contractor and an employee. Now, from an IRS standpoint, from a regulatory standpoint, they're going to have their own kind of critiques of whether you're a contractor or not. One more point before we go into those. If you're an employee, obviously, you get your income reported as a W2 income telling the IRS that you made money. As a contractor, you get your income reported typically as a 1099 if certain conditions are met, meaning you're not like the contractor isn't an employee. I mean, the contractor isn't a company and typically earns over a certain dollar amount, which is fairly low, like five to $600 or so dollars, then you have to 1099. And remember what a 1099 is? To the contractor, it's similar to a W2. You're basically telling the contractor, look, I paid you this amount this year, and I'm reporting it to the IRS. And therefore, you really ought to report it in some way on your Form 1040. If you don't, you'll probably be notified by the IRS. Now, the problem with a 1099, again, is there's no withholdings. The employer is not responsible for withholdings. And also, when you're a contractor, you may have job-related expenses because you're on business that are not going to be included on the 1099. They're going to be something you have to deduct on the 1040 in some way on the Schedule C. So there's more responsibility if you're a 1099, if you're a sole proprietor, if you're a contractor to report your own income, to report your expenses, and make sure you get all that taken care of. Now, from the IRS standpoint, they're kind of weary of an employer reporting someone as a contractor rather than an employee. I mean, from a regulatory standpoint, you may rather have someone reported as an employee from an IRS standpoint, because then you can hold the bigger, larger employer, the bigger company most likely, responsible for collecting taxes from the contractor. So rather than having the smaller contractor, the smaller business, probably the sole proprietor, responsible for reporting the income and paying their own taxes. They probably rather have the larger company that they can put more restrictions on to be required to withhold the taxes. Therefore, they probably are going to lean towards the idea that if someone's an employee, we want to make sure they're reported as an employee. So what does it mean to be an employee? There's a bunch of different tests that you can have, but the more control the employer has over the employee's work, the behavioral control, financial control, and the relationship between the party, if there's more control on the employer, then you would typically say, hey, that's more of a wage relationship. Meaning if you had someone like a secretary that was or an office worker that was going in every day and you told this is what you need to do, I need, I need this done, I need that done. It's nine to five job. You need to be here from nine to five and whatnot. Then that's a pretty high level of control. It would be pretty difficult to say if someone's working a nine to five job in a specific defined location and their jobs are being dictated on a daily basis, then that's pretty much an employee. It'd be pretty difficult to argue that someone's a contractor. If, on the other hand, we had someone that needed to do a specific job like paint the house or something like that or paint the office, then that would be more likely that we'd say, hey, this is the job we need done. You have your own tool and it would be the contractor's responsibility to bring their own tools, decide how to get the job done, work out the dates that will get the job done, and the goal there being the end goal, getting the place painted. Now, those are two pretty stark differences between a contractor and an employee and there's a lot of gray area as to when someone is a contractor and an employee in different industries. They could be industry specific. So there could be a lot of areas where there's debate as to whether we should be a contractor or an employee and it's important to make sure to go over those rules. So we don't get in trouble on that. We don't want the IRS to come back and say that someone is reported as a contractor and they should have been an employee and then say that we need to report Social Security Medicare. So it's really an important kind of distinction, the distinction between whether someone is an employee or a contractor. The employee has much more responsibility for reporting by the employer. The contractor still some responsibility to report the income given, given in certain conditions, but less responsibility in terms of many other types of regulations, including the concept of withholding the taxes for the contractor. They're very productive. Payroll paid off. Goodbye.