As we head into the busy season for so many small businesses, let’s brush up on the tax issues surrounding seasonal workers. Some tax liabilities and responsibilities are tried-and-true, but others—like how no taxes on tips and overtime affects your strategy—will be new to us all moving forward.
Classification Still Matters (Employee Versus Freelance or Contract)
Classification matters in this context because it determines whether you, as the employer, are on the hook for federal income and all payroll taxes. Guidance surrounding the classification of employees versus independent contractors has—and continues to—swing back and forth depending on the presidential administration. So, not surprisingly, the 2024 changes have reverted back to the rules circa 2019, which are decidedly more employer-friendly.
But that doesn’t mean classification doesn’t matter. The federal government and states (including Texas) will investigate the issue, particularly if they suspect that substantial employers or high-risk industries, such as construction and oil and gas, are costing them valuable tax revenue. Private and class action litigation are also significant considerations (just search the topic online, and you’ll find plenty of law firms in Texas alone happily explaining the process to potential plaintiffs).
Do Your Paperwork & Follow Regulations
If employment is, indeed, seasonal, check the “seasonal employer” box on every Form 941 you file, says the IRS. This gives the agency a heads-up that you may not be filing a return for one or more quarters during the year. Neglect this step and you’ll be wasting both yours and the IRS’s time and resources when they are compelled to investigate.
Additionally, consult with your legal counsel to determine if there are any changes to employment laws and regulations that may impact hiring seasonal help. Ignoring this area can be quite costly. This certainly includes Form I-9 violations, which are directly tied to the immigration focus of the Trump administration.
Be sure your processes are in place for seasonal as well as permanent hires and that the I-9 technology you’re using is doing its job (some vendors, as noted here by HR Dive, are surprisingly noncompliant). “Innocent” paperwork errors and violations alone can cost a business thousands of dollars in civil penalties per employee.
Other Payroll Considerations
Have clear parameters in mind for your seasonal workers. If they are, in fact, employees, will they be part-time or full-time? Will they be working overtime? How do their numbers affect your overall headcount? Do some seasonal employees have other jobs? If your seasonal employees are operating outside the usual process, do you have the necessary tools in place for their success, including timekeeping and payment systems? Are you aware of how the new tip and overtime regulations affect your seasonal workers?
Each one of these areas can affect your tax responsibilities. The bottom line is that hiring seasonal help isn’t business as usual. Be sure to treat it with special care.
Feel free to contact us with questions.
