Tax Related Tips for Staffing Firms

1. Understand how to classify your employees

Are you working with employees, independent contractors, or both? Although it may be tempting to label your employees as independent contractors because of tax savings, you need to consider carefully if they should be classified as W-2s instead. Be careful - organizations face steep interest payments, fines or even criminal punishments when they improperly classify a worker. Be aware of your state's specific laws too, some - like California - have more stringent rules than others.

Read the IRS rules classifying Independent Contractors vs Employees

2. Take advantage of tax credits

WOTC

If applicable, take advantage of the Work Opportunity Tax Credit (WOTC), a federal tax credit rewarding companies for employing individuals who have previously faced significant barriers to employment such as veterans, long term unemployed, and food stamp recipients. Employers can earn up to $9,600 in federal tax credits for each qualified employee, and there is a good chance you may already be hiring individuals from these target groups but not claiming the tax credits. To apply for these tax credits, employers are required to fill out two forms, IRS Form 8850 and ETA Form 9061, during a new hire onboarding. They must then submit those forms to the Department of Labor within 28 days of the new hire to be eligible for the tax credits. Many companies will outsource the WOTC to a tax credit processing firm for their expertise.

3. Avoid common payroll tax pitfalls

Many staffing firms face common pitfalls when it comes to payroll taxes. Keep these in mind to avoid IRS scrutiny and bad consequences for your business.

• Not documenting and responding to notices – if you see a notice from the IRS, don’t pretend it’s junk mail. Small businesses historically are the largest source of uncollected taxes, so tax notices could come at any time and not responding could put your business at risk.
• Misclassifying employees – see #1 above
• Borrowing funds and making late deposits – when a cash crisis occurs, pulling money from employee paychecks may seem like a good short-term solution, but be wary. You have to ensure you have the resources available to pay your payroll taxes on time.
• Not understanding the basics - Did you know that you are supposed to file payroll taxes in the state where the work was performed, not the state where the worker lives? Or that some states require employers to pay both payroll taxes and income tax returns? If you aren’t familiar with the payroll tax basics, it is important that you work with a company that does in order to avoid harsh penalties.

4. File on time

You can avoid tax penalties by paying your federal and state taxes on time. Your federal tax deposit must be made electronically through one of these methods:

• The Treasury Department’s free Electronic Federal Tax Payment System (EFTPS)
• A trusted third party, such as a payroll service or tax professional
• A financial institution that can initiate an ACH Credit payment

5. Keep records like crazy

Should the IRS ever question your payroll or business, these records must be kept for examination. Make sure that you have:

• The names, addresses and Social Security numbers for every employee
• The period of employment and compensation for each employee
• The total amounts of pay given to each employee
• The amounts of each payment kept as taxable wages
• Complete copies of each employee’s W-4 form
• All dates and records for each tax deposit made by your company
• Thorough copies of all tax returns filed
• Any and all W-2 forms that were undeliverable to past employees

6. Think about next year

Once your taxes are done this year, it is time to start thinking ahead to next year. Some questions to consider for your business:

Changing entity. If a sole proprietorship has grown, maybe it is time to incorporate or form a limited liability company (LLC). An existing C corporation may want to become an S corporation, or vice versa.

Accounting methods. Tax law dictates some accounting methods that must be used, but there is also room for choice in some areas. Making changes can have long-term consequences and may also trigger income.

Declaring dividends. Profitable corporations may want to distribute earnings to shareholders. While dividends are not deductible, shareholders who receive them pay tax on them at favorable capital gain rates (zero, 15%, or 20%, depending on the individual’s tax bracket).

Issues for going multi-state and international. A business may begin to sell across borders into other states and/or other countries. This raises a host of issues, including taxation, international intellectual property protection, and personnel.

Other legal matters to discuss with your attorney. Are you acquiring the assets or stock of another business, assigning or terminating a lease, or seeking financing from outside parties? Review these matters with your accountant to make sure you understand the tax ramifications of the actions taken.