Seller Handbook

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Seller Handbook

How to Make Hiring Less Taxing

Ready to take on your first employee? First, think about what type of help you need and the tax implications of your decision.

By Bonnie Broeren Feb 18, 2014
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Oh hey, small business superstar. So you've done it  — grown your business from the ground up and found your sales sweet spot. You know all about Getting Help From Your Community When You Need It, and you’re ready to take your network to the next level; it’s time to hire help. Taking on your first employee can be both daunting and exhilarating, especially when you're running a start-up. But before you start worrying about filing W-2 forms and researching Workers' Compensation insurance, think about what kind of employee you want to hire  and the associated tax implications. Keep the following factors in mind as you navigate the process.

Should you hire an employee or independent contractor?

There are different tax and reporting requirements involved with hiring an employee versus an independent contractor. For an employee, you generally must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax. You do not generally have to withhold or pay any taxes on payments to independent contractors.

So which one should you choose?  An employee — whether seasonal, part-time or full-time — is someone whose daily activities are generally under your control. For example, you can hire or fire them, set any rules and regulations surrounding their work, supervise their work, determine who they report to, to what extent they are able to influence your business, and whether they have any share in the profits, losses, and liabilities of your business.

An independent contractor, on the other hand, is someone whose daily activities are generally not under your control. With an independent contractor, you can only control the result of the work, not how it will be done. Examples of independent contractors are lawyers, accountants or other contractors or subcontractors who are in an independent trade, business or profession in which they offer their services to the general public.

Written agreements or contracts can further clarify your intention that a person be considered your employee or independent contractor. You can find more detailed information about what factors make someone an employee in the U.S. Equal Employment Opportunity Commission (EEOC) Compliance Manual, which can be found here. For more detailed information about the difference between employees and independent contractors, check out the US Internal Revenue Service’s guide here.

Are the rules the same for all employees?

When you're dipping a toe into the hiring pool, you may feel more comfortable tapping family members or hiring part-time or seasonal help. Here's the skinny on the tax requirements associated with each.

Your Spouse: If you and your spouse act like partners and contribute equally to the business, including decision-making, money you have each contributed, and services you each provide, then you will be taxed as a partnership, and need a Form 1065 (US Return of Partnership Income). If one spouse is essentially running the business — meaning that he or she is the decision-maker and the other spouse is acting as an employee, then the employee-spouse is subject to income tax, social security and Medicare withholding, but not Federal Unemployment Tax Act (FUTA). Read more on the IRS’ website about additional tax arrangements for spouses who work together.

Your Child: Child labor standards affecting minors under the age of 18 vary by state. Check out the U.S. Department of Labor's website for more information about your state's requirements. Wages you pay to your child are subject to income tax withholding, regardless of that child’s age. Additional tax obligations depend on what kind of business you are running and the age of your child. For example, if you are operating as a sole proprietorship and paying wages to your child, who is under the age of 18, those wages are not subject to social security or Medicare taxes. This is also true if you are operating as a partnership and both you and your partner are parents of the child. If the child is under the age of 21, those wages are also not subject to FUTA . Learn more about the tax implications of employing your children.

Your Parent: If your parent works for you, their wages are subject to income tax withholding, social security and Medicare taxes, but not FUTA tax, regardless of the type of services provided. If you are paying your parent wages for services unrelated to your business, social security and Medicare taxes do not apply, but they may apply to domestic services under certain circumstances. You can read more about this exception at the IRS’ website here.

Part-time and Seasonal Employees: Part-time and seasonal employees are subject to the same tax withholding rules that apply to other employees. You can read more about tax liability for part-time or seasonal employees at the IRS website here.

Have more questions?

Tax and employment laws are complicated and vary state by state. A good lawyer or accountant can help you navigate those laws. If you cannot afford a lawyer or an accountant, however, there are also several resources maintained by various government agencies to help small businesses, including:

SBA’s Guide to Hiring Your First Employee Small Business Taxes: Virtual Workshop IRS Employer Tax Guide

Do you have any tips for hiring employees? Share your advice in the comments.

This information is for educational and informational purposes only. The content should not be construed as legal advice. It is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The author and Etsy, Inc. disclaim all responsibility for any and all losses, damages, or causes of action that may arise or be connected with the use of these materials. Please consult a licensed attorney in your area with specific legal questions or concerns.

Author

Bonnie Broeren from bmbroeren

Bonnie Broeren quit her day job of practicing law after six years in order to join (and eventually manage) Etsy’s Policy team. The Policy team works hard to support seller growth while protecting Etsy’s mission and values as a B Corporation.

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