kweaver,
You closed your thread so I can’t add this comment there, but as a former training instructor for the Social Security Administration I really need to warn you not to follow that kind of accounting. I don’t know what the scope of your spreadsheet is or your role at the company, but if it will in any way be reconciled with year-end tax accounting you could be opening the worker and/or your company up to serious problems with the IRS.
The IRS will notice if the worker and company report different amounts. If the company under-reports the compensation and the worker reports $30K, the IRS is going to flag the mismatch. That’s problem #1. If the worker is an “employee” the IRS will not accept 15.3% from the worker to make up the full FICA tax, regardless of whether he reports $30K or the fictitious amount. IOW, he will not be allowed to pay both halves himself. That’s problem #2. The worker will be prevented from claiming typical business expenses that independent contractors can claim. If he tries to do so, that will get the IRS’s attention, and your company may not want that. Call it problem #3. And don’t forget that by under-reporting the company is not getting off the hook–the IRS will still come after the company for 7.65% of the lower, fictitious amount. That’s problem #4.
All of that assumes the worker is an “employee”. The IRS and SSA have strict guidelines for determining whether the worker is technically an employee or an independent contractor, but that’s all beyond the scope of this discussion so I’m not going to argue one way or another. I’ll assume your company’s accountant has a handle on that, but just want to point out you should take care not to throw the term “employee” around casually when it can obfuscate the discussion. As a general rule, the company will issue IRS form W-2 to employees at the end of the year and IRS from 1099 to independent contractors.
In the case of a W-2, the company pays 7.65% FICA tax to the IRS out of their own pocket and withholds 7.65% from the employee’s gross pay and forwards that to the IRS as well. The worker does not pay any FICA tax to the IRS himself. The worker reports the gross pay on his tax return, and if it matches what the company reported, the IRS is happy.
In the case of a 1099, the company withholds no FICA from the worker’s compensation and the company pays no FICA whatsoever to the IRS. The company reports $30K “non-employee compensation” to the IRS and takes the full $30K as an expenditure on the company’s tax return. The worker reports $30K received (which matches and keeps the IRS happy), deducts business expenses (an advantage seriously restricted if he were an employee), and then the worker pays the full 15.3% FICA tax to the IRS. (Yes, for the CPAs lurking, there’s a SE credit, but that’s besides the point.)
The point is that, as far as you’re concerned, your spreadsheet should separate W-2 workers from 1099 workers. It’s not merely a matter of how to tweak the math, it’s also a matter of who is responsible for paying the FICA taxes to the IRS–and to avoid confusing yourself at year-end.
