There are many advantages to owning a business. One of them is the tax advantages to hiring family members when the business is structured as a sole proprietor or partnership.

When employing a child under the age of 21, the wages are exempt from FUTA tax. Furthermore, if the child is under the age of 18, wages are exempt from Social Security and Medicare (FICA) taxes. If the parent is employed by the child, the wages are exempt from FUTA taxes. Every state is different, but in Tennessee, the SUTA taxes are exempt in all three scenarios.

Every situation is unique so if you have further questions, feel free to give Payroll Cents a call at (865) 607-1658

The IRS requires all businesses that hire workers to report wages paid. Form 1099 is used for workers who are classified as independent contractors and Form W-2 is for employees.

A worker classified as an independent contractor is not subject to payroll tax withholding, but the IRS requires such a worker to meet certain standards to be legally classified as an independent contractor. The IRS will presume that a worker is an employee unless such evidence is available.

There are two situations in which an independent contractor can receive both Forms 1099 and W-2. The first is if the worker performed duties as an employee and independent contractor concurrently for the same employer. Basically this means the worker had a job as an employee and another job as a contractor for the same company. The other situation is where the worker held these two jobs at separate times during the same tax year for the same employer.

Filing both a 1099 and W-2 for the same worker will likely cause the IRS to suspect wrong classification of workers as independent contractors. If the IRS rules that a worker was wrongly classified as an independent contractor, there are significant tax penalties imposed on both the employer and employee. A way to avoid such a consequence is for either the employer or employee to file Form SS-8 in advance with the IRS, which will result in the IRS officially determining the proper worker classification.

If you need help preparing your payroll for your workers, Payroll Cents is here to help. Payroll Cents will make sure your independent contractors get paid consistently and your employees' payroll taxes get filed correctly. Also, Payroll Cents can help you convert independent contractors into employees (hopefully before the IRS tells you to).