Ask the Small Biz Adviser By Stephen Windhaus • Bankrate.com

Hiring a worker has multiple tax and paperwork consequences.

Dear Small Biz Adviser
I have started painting on the side along with managing a self-storage facility. I paid my taxes off of a Form 1099 last year.

I am considering hiring some help and need to know what taxes, workers' comp and any other info you can give me about self-employment taxes and how it will affect my income. I need this extra income in order to survive. 

For example: If I make $1,500 after buying paint supplies and I pay someone $12 an hour and it takes 60 hours to finish the house by themselves without me helping, what will I clear and what did it take to figure this total? Include any tax that is owed from my part also, please.

Thank you very much.
Mark

Dear Mark:
The expenses of payroll make many employers think twice about hiring staff. In part those expenses resulted in many of the layoffs witnessed in the last 20 years by medium to major employers nationwide. And some have simply shifted workplaces overseas.

Payroll expenses are federal, state and local taxes charged against the actual payroll paid out to employees. At the federal level you have the following:

• 6.2 percent for Social Security on the first $76,200 of an employee's wage; the employer matches that employee deduction.
• 1.45 percent for Medicare on all the employee's wages; the employer matches the employee deduction.

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• 12.4 percent for Social Security on the first $76,200 if you are self-employed.
• 2.9 percent for Medicare on your net earnings if self-employed.
• 0.8 percent to 6.2 percent for federal unemployment tax on the first $7,000 of an employee's salary, all of which is paid by the employer.
• $10,500 is the maximum amount you can deposit into a 401(k) plan in any year. (Congress is considering legislation that would gradually raise this limit.)
• Any benefits expenses you pay for your employees' medical benefits plans are also categorized as a payroll expense. For that amount you need to contact a related insurance carrier or its agent.

From your example above it is determined this project cost you $720 in wages. The breakdown of total minimal costs is as shown in the table:

If the person is contracted, as opposed to being hired as an employee, your bookkeeping would look like this:

Self-employment taxes in both cases are based on the standard deductions from $1,500 less employee taxes.

I have not included the matter of worker's compensation due to the diversity of policies and procedures in place by state. Go to AFSCME's directory of state departments of labor to find a contact who can give you specific information for your state.

Your example provided a graphic opportunity to demonstrate just why so many more and more employers are going it alone instead of hiring staff. For example, in my own agency I contract financial and marketing specialists for business planning. I avoid the taxes and the voluminous paperwork from reporting on any employees.

I do hope this has helped you in your decision.

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-- Posted: July 25, 2000