Small Business Tax Questions – How Do You Pay A Part-Time or Seasonal Employee?

Do you own a small business and do the most of the work yourself? But on occasion you find it necessary to hire some help, perhaps on a part-time or seasonal basis. How do you handle these intermittent employees? This article will answer that question.

Regardless of how often an employee works for you, you always pay him on the same basis: fair market value of the services rendered. Whether a person works full-time or part-time, all year-round or just for a few weeks during crunch time, you determine a reasonable wage and pay him accordingly.

Also, don’t forget that issuing a real paycheck means you must calculate and deduct payroll taxes – federal, state and local income taxes, plus Social Security and Medicare taxes. Again, even a very part-time or sporadic employee is still an employee, and you must do all the paycheck withholdings that you do for a full-time employee. And doing “real” paychecks means you must also make payment of those payroll taxes on a timely basis, and you must also file payroll tax returns (usually monthly or quarterly) and issue a Form W-2 to all your employees at the end of the year.

End result: even having just one part-time employee means you face a small mountain of paperwork! It’s just a part of the cost of doing business.

Of course, if your business is a corporation, or an LLC being taxed as a corporation, and you are doing any work for the business, then you must pay yourself as an employee of the business. Sole proprietors and partners should not pay themselves as an employee, but corporation owners who work in their business must be treated as an employee. The fact that you also happen to be a shareholder does not mean you are not to be compensated with wages or salary for services rendered.

It is a huge mistake for corporate shareholder/employees to only withdraw profits from their corporation. If you attempt to avoid employee compensation by claiming that all your withdrawals are “profit distributions”, you will be in for a rude awakening on audit day. Numerous well-known tax court cases have proven the IRS correct in re-classifying such “dividends” as wages. You’ll then have to come up with the accompanying (and now late) payroll tax payments, and you’ll face still late payment penalties and interest on a potentially large sum of money.

So you’ve been warned: if you have part-time or seasonal employees, pay them just like a year-round full-time employee, with bona fide paychecks for wages paid. And if you are an employee of your business, don’t forget to pay yourself like one, too.

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