Withholding taxes may seem like a nuisance but if you have "employees" then you are responsible by law to withhold several federal, state, social security, medicare and possibly local taxes.

Please also keep in mind that prior to commencing operations and hiring "employees," you technically need an employer identification number which is commonly referred to as a EIN. You can visit the IRS website which details the necessary steps to obtain an EIN. You will also need to rely on the employee's Form W-4 to properly calculate the amount of withholding taxes taken out the employees' paychecks.

Employee or Contractor?

In addition, there is a significant distinction in an employer's tax reporting responsibilities for employees verses independent contractors. A business generally does not have to withhold or pay any federal taxes on payments to independent contractors. The rules for classifying a worker as an independent contractor are becoming enforced more and more by the IRS, so please review the rules below in classifying a worker appropriately.

If you answer yes to any of the questions below, then your workers are probably independent contractors:

1. Do they--rather than the employer--determine how the job is to be performed?

2. Are they paid by the job or project rather than an hourly wage or salary?

3. Are their services offered to the public and not just to one particular person, boss or business?

4. Do they use their own tools and equipment?

5. Do they determine the number of hours worked?

6. Do they have a contract stating that they will be paid as an independent contractor?

If the answer was no to the majority of the questions above then you will want to ask yourself these questions:

1. Do they have set hours of work?

2. Are they paid in regular amounts at set intervals, such as an hourly wage, weekly salary, etc.?

3. Do they work at your workplace or at home?

4. Can they be fired?

5. Do they receive training from you?

6. Do they have to follow specific instructions about how the work is to be done?

If you answered yes to the majority of these questions, they are likely classified as an employee.