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Tax Tips for Staffing Agencies

With the new year comes concerns about staffing news and about correctly filing staffing taxes for your temporary staffing agency. Tax surprises are rarely good. Whether you have filed before or your agency is new within the last year, getting through tax season with accurate and acceptable payroll and tax records are imperative to the success of your business.

Know Your Company’s Tax Status

Although it depends somewhat on your location, most states consider staffing or temporary agencies to be the full employers of temporary employees. This designation requires that your business has a state tax identification number as well as an EIN from the federal tax administration. Double-check with your tax attorney or accountant for the classification of your company before you begin the tax process.

If your agency is, in fact, the employer of temporary employees, you may also find yourself subjected to paying employment taxes. These include temp agency payroll taxes, Medicare, Social Security and federal unemployment taxes and federal income tax withholding.

Completing all of these forms and filings can make your staffing taxes much more complicated than you had originally envisioned. For that reason, consider these tips to help you complete your tax process:

1. Understand Your Payroll Taxes

Your staffing agency is subject to taxation at both the federal and state level, and you are responsible for collecting unemployment taxes from your employees. Although it may be tempting to label your employees as “independent contractors,” the facts that you have legally provided these individuals with their set hours of employment, that you have a continuing working relationship with them and that you are paying them with a set payment method all indicate that they are business employees.

When companies pay your agency to employ your temporary workers, you are responsible for collecting payroll taxes from the pay that is passed on to those workers. The amounts of money that change hands should be clearly spelled out in the contract you make with the hiring companies, as well as with your employees.

2. Calculate the Withholding Amount from Employees’ W-4 Forms

Federal law mandates that you determine the amount withheld from each employee via the information provided by the employee on his or her IRS Form W-4.

With each wage payment that you make to the employee, you are required to withhold an amount. This number is likely different for each employee, depending on his or her earned wages and claimed exemptions. Each wage payment is considered a separate taxable event and must be treated as such.

Use the standard tables provided by the IRS to determine the amount withheld for each of your employees. This amount is based on:

  • The size of each wage payment
  • The frequency of payroll payments
  • The employee’s current marital status
  • The employee’s claimed withholding exemptions as filed on the W-4 form

The W-4 forms are only for you and your company to determine proper exemptions and withholdings as you are calculating your payroll taxes. You do not need to file them with the government or the IRS unless there is a discrepancy in information.

The total amount that you withhold should approximate each employee’s year-end tax liability. If you do not have a completed W-4 for an employee, treat that person’s withholdings as being single with no exemptions.

3. Provide a W-2 to Each Employee

As a company, you are required to withhold the proper amounts from your employees’ pay and to deposit those amounts with the appropriate tax agencies. These withholdings will include federal and state taxes, Medicare and Social Security taxes and federal and state unemployment taxes. In order to complete these requirements, you must provide all of your employees with proper W-2 and 1099 reports that thoroughly explain their yearly compensation and withholding amounts.

All employees must receive a W-2 by January 31 of the year following the employment year. Those who do maintain an independent contractor status and earned more than 600 dollars in compensation should receive a 1099 instead.

4. File and Pay Federal and State Taxes 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

Many states now also require your deposits to be made electronically. Consult your state agencies for more information.

All deposits must be made on time. If your due date falls on a Saturday, Sunday or national legal holiday, you have until the close of the next business day to complete your deposit.

5. Maintain Proper Records

Once you have successfully distributed all your W-2 and 1099 forms to your employees and independent contractors, you must make sure that you have proper records that explain the payroll taxes that you paid for the year. Per the federal requirements, keep all records for at least four years before destroying them. Check your state record-keeping requirements as well.

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

All of these records must be kept in an orderly fashion to be immediately examined by an IRS official if requested.

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