Business and law exams test federal payroll rules because every contractor with employees has to follow them. These are the ones that come up, each from the IRS's own publications.
Employee or independent contractor
- A worker is generally an employee if the business controls what is done and how it is done. An independent contractor is directed only as to the result (IRS Pub. 15, sec. 2; Pub. 334, ch. 1).
- Treating an employee as an independent contractor can make the business liable for the employment taxes plus a penalty (IRS Pub. 334, ch. 1).
- Payments to subcontractors are reported on Form 1099-NEC. A missing or wrong taxpayer ID on Form W-9 means backup withholding (IRS Pub. 334, ch. 1; Pub. 15).
Trust fund taxes
Withheld income tax and the employee's share of FICA are held in trust for the government. The trust fund recovery penalty is 100 percent of the unpaid tax, assessed on a responsible person who willfully fails to pay it over (IRS Pub. 15, Introduction and sec. 11).
Deposit schedules
- Monthly or semiweekly is decided by the four-quarter lookback period. Total taxes of $42,000 in the lookback period means a monthly depositor, and a new employer is monthly in its first year (IRS Pub. 15, sec. 11).
- A monthly deposit is due by the 15th of the following month, so March wages are deposited by April 15 (sec. 11).
- A semiweekly depositor deposits Thursday paydays by the following Wednesday, and $110,000 or more accumulated on any day is due the next business day (sec. 11).
Forms and records
- FUTA is paid only by the employer, never withheld; timely state unemployment contributions earn a credit against it (IRS Pub. 15, sec. 14).
- Form W-2 goes to employees by January 31. With no Form W-4 on file, withhold as if the employee is single with no adjustments (Pub. 15, Calendar and sec. 9).
- Keep employment tax records for at least four years. If income is understated by more than 25 percent, the IRS has six years to assess (Pub. 15; Pub. 583, Table 3).
Practice contractor business and law questions for your state, with explanations and timed mock exams.