As your business grows, you may start asking yourself if you should hire full or part-time employees or hire subcontractors to perform specific jobs on an as-needed basis. If you hire contract labor, your paperwork is much easier. However, just calling someone contract labor doesn’t make him/her so. If you incorrectly classify those working for you, you may end up paying substantial penalties and back taxes to the IRS and the State of Colorado.
Most individuals who work for you will be considered either common law employees or independent contractors. Unfortunately, there are many state and federal laws that are used to define an employment relationship and to determine whether an individual who performs services for you is an “employee” or an “independent contractor.” Publication 15-A, “Employer’s Supplemental Tax Guide,” has more information on determining whether an individual is an independent contractor or an employee.
Common law employees are individuals who perform services subject to the control of an employer regarding what, where, when and how something must be done. The actual working relationship between an individual and a business is more important than the title (employee, subcontractor, day laborer, etc.) when determining if someone is a common law employee. It does not matter that the employer gives the employee substantial discretion and freedom to act, so long as the employer has the legal right to control both the method and results of service. You will file a W-2 at the end of the year to report wage and tax withholdings.
Persons who follow a trade, business or profession such as lawyers, accountants or construction contractors who offer their services to the general public are usually considered independent contractors. The key characteristic of an independent contractor is the worker’s “independence.” An independent contractor relationship is a business-to-business relationship; it is NOT a business-to-individual relationship.
You will need to file a 1099 with the IRS at the end of the year to report the payments made to each contractor that is not a corporation. The IRS uses a list of factors to determine whether a worker is a common law employee or an independent contractor. The Colorado Unemployment Insurance Liability Unit and the Colorado Division of Workers’ Compensation use nine criteria established by state law (8-40-202 and 8-70-115, C.R.S.) to determine whether a worker is a common law employee or an independent contractor. As a general rule, any individual who performs services for pay for another is deemed to be an employee, unless it is shown that the worker is free from control and direction in the performance of the services and is customarily engaged in an independent trade, occupation or business related to the service performed. The burden of proof is on the employer to show that the foregoing two tests are met. The employer may create a rebuttable presumption of an independent contractor relationship with a worker.
When Using an Independent Contractor, Use a Written Document or Contract that:
The criteria stated above, along with other factors, form a basis for how the State distinguishes between employees and independent contractors. No one factor or criterion is by itself conclusive evidence that an individual worker is an employee or an independent contractor. The following is a summary of the reasoning used by the Colorado Courts in deciding unemployment insurance cases on the independent contractor vs. covered employee issue. Please note that this summary should not be considered a substitute for legal advice.
The question of control is related to general control and is not concerned with the fact that the worker can exercise his/her own judgment in performing the detail of the work. Control refers to the right to control and not to the actual control used by the company. The possibility of future control can be used in determining if an individual is free from control and direction. The power to terminate a contract for personal service at any time without liability is a strong indication of control. The right to terminate services at any time involves the right to control. This factor, in addition to the fact that the worker is required to use the material furnished by the company and meet the quality control standard of the company, is usually sufficient to establish control. Other factors that may be considered indicators of control are: the worker reports on a daily basis, the worker is provided with an outline of procedures, and the worker is obligated to keep records or uses the name of the company.
Even though the company retains no right to control the performance of the worker, the worker must be customarily engaged in an independent business related to the service performed. The worker is not customarily engaged in an independent trade, occupation, profession or business related to the service performed if the worker devotes his/her whole time to performing duties for one company, is not engaged in any other work and performs the service within the usual course of business of the company. A company contesting liability for unemployment compensation taxes under independent professional exception is required to prove not only that a worker is customarily established and engaged in an independent business, but also that the independent business is related to the services the worker is performing for the company and that the worker is engaged in the business venture at the same time the worker is providing services for the company.
Even though a contract is framed to suggest existence of an independent contractor and not an employer/employee relationship, that fact alone does not create an independent contractor relationship. What is done under the contract is more significant than what the contract says. A company cannot circumvent the intended protection of the Colorado Employment Security Act by means of a contract that would place in jeopardy the security of employees.
The following is a summary of some criteria used by the IRS in determining whether a worker is an employee or independent contractor:
If a worker is a common law employee, the employer is responsible for state and federal income tax withholding, social security taxes (FICA), and state and federal unemployment insurance taxes. All common law employees must be covered by a workers’ compensation insurance policy from the very beginning of employment. No distinction is made between different types of common law employees. Managers and supervisors are treated the same as line workers. There is no difference between full-time or part-time employees or employees hired for only a short period of time.
An independent contractor is responsible for his/her own self-employment taxes. If she/he has employees, she/he also has the obligation to comply with all employer responsibilities, including workers’ compensation insurance for his/her employees. If the independent contractor does not have and maintain workers’ compensation insurance, the prime contractor is responsible for providing coverage. The prime contractor may recover from the independent contractor the cost of providing workers’ compensation insurance to the independent contractor’s employees.
If you are not sure whether your workers are employees or independent contractors, you should contact the IRS, the Colorado Division of Workers’ Compensation and the Unemployment Insurance Tax Liability Unit of the Colorado Division of Employment and Training for a determination of an actual employer/employee relationship. Potentially, a worker could be considered an employee by one agency and an independent contractor by another. Form SS-8, “Determination of Employee Work Status for Purpose of Federal Employment Taxes and Income Tax Withholding,” should be filed with the IRS. You can also request a Advisory Opinion from the Colorado Department of Labor and Employment. An Advisory Opinion is available to employers seeking advice on proper classification of workers. If you would like to request an advisory opinion on whether you should classify individuals as employees or independent contractors, you can complete a request form at colorado.gov/pacific/cdle/ensure-proper-worker-classification and include a nonrefundable payment of $100 made payable to the Colorado Department of Labor and Employment. For more information, visit colorado.gov/cdle.
Commissioned delivery drivers, insurance agents, full-time commissioned sales agents of products for resale or for use in the buyer’s business operation and individuals who do piece work with materials supplied by the employer are considered statutory employees by the IRS. The employer is not required to withhold federal income tax from payments. However, if the contract states that an individual must perform the services personally, the individual will perform the service on a continuing basis and the employer will supply the equipment, then the payments are subject to FICA. Payments to commissioned delivery drivers and sales agents are subject to unemployment insurance tax.
Because statutory employees are similar in some respects to both common-law employees and independent contractors, you should contact the Division of Workers’ Compensation directly regarding your workers’ compensation liability. Order W-2s and 1099s from the IRS.
If your business is a sole proprietorship, your children who work for you are not subject to FICA and Medicare taxes until age 18. If a child is paid for domestic work in the parent’s home, wages are not subject to FICA and Medicare taxes until the child reaches age 21. Federal unemployment insurance taxes are not required for wages paid to children under the age of 21 who work for their parents. Whether a child can be claimed as a dependent on the parent’s individual tax return is not considered. All wages paid to children may still be subject to income tax withholdings; use form W-4 and the appropriate tables to determine if income tax withholding applies. Wages paid by a sole proprietor to a spouse are subject to income tax withholding and social security taxes (FICA), but not to federal unemployment insurance taxes. All wages paid to a child or a spouse are subject to withholding taxes, FICA and state and federal unemployment insurance taxes if the parent/spouse’s business is a partnership or a corporation (unless each partner is parent of this child). Workers’ Compensation Insurance must be provided for family members/employees.
Generally, working corporate officers are considered employees by the IRS and may not be paid through a distribution of dividends only. They must be paid a “reasonable wage or salary.” All wages are subject to federal and state wage withholding, FICA and unemployment insurance taxes. Corporate officers who own more than a ten percent share and who have a managing interest in the business may elect to reject workers’ compensation coverage. These rules apply to the corporate officers in both C and S Corporations.
The employees of charitable 501(c)(3) tax-exempt organizations may be subject to special exemptions. All wages paid to a common-law employee are subject to federal and state income tax withholdings. All wages are subject to social security tax unless wages are less than $100 for an entire calendar year or are paid by a church or a church-controlled organization that opposes payment of social security taxes for religious reasons. All 501(c)(3) tax-exempt organizations are exempt from payment of federal unemployment tax. All employees must be covered by workers’ compensation insurance regardless of 501(c) (3) status.
An alternative to hiring your own employees is to contract workers from a temporary employment agency or an employee leasing agency. You pay the agency a fee to provide the number and type of employees you need and specify the conditions they must work under, but the individual workers remain employees of the agency. The agency is responsible for all payroll taxes, unemployment insurance and workers’ compensation. However, if a leasing company defaults in payment of unemployment insurance, the client company is then responsible for payment of unemployment insurance. A temporary agency is used when workers are needed for a short period of time. Leasing agencies provide employees under contract on a long-term basis.
If you hire someone to work in your own home, you may have responsibilities as a household employer. If the employee earns more than $1,300 per year, you are responsible for social security and Medicare taxes. If the employee earns more than $1,000 during a quarter, you will also be responsible for unemployment insurance. The law does not require that you withhold federal or state income taxes for your employee. However, you may do so voluntarily if requested by your employee and she/he completes Form W-4. A W-2 must be given to the employee. Workers’ Compensation Insurance must be obtained for household employees who work 40 or more hours per week or five or more days per week. For additional information regarding your responsibilities as a household employer, call the IRS and request Publication #926, “Employment Taxes for Household Employers.”
If you operate a seasonal business, you may file a “Request for Seasonal Determination” with the Unemployment Insurance Liability Unit of the Department of Labor and Employment. A business that operates year-round and also hires seasonal employees may also file. Seasonal employer status will disqualify seasonal employees from collecting unemployment benefits during your off season. As a result, your unemployment experience rating will not be affected. However, if a seasonal employee is unemployed at the beginning of the next season, she/he will qualify to collect unemployment benefits at that time. To qualify as a seasonal employer, your seasonal period may be no longer than 26 weeks per year; also, no more than 25 percent of your employees, in a seasonal occupation, may work longer than the 26-week period. There must be at least 45 consecutive days when you have no employees in the seasonal occupation. If your entire business operates less than 26 weeks per year, then all your employees automatically qualify as seasonal employees. For example, if you employ seasonal groundskeepers and “regular” office workers, no more than 25 percent of all your groundskeepers may work outside your 26-week seasonal period, and there must be a minimum 45 days when no groundskeepers are working. Your office workers may continue to work the whole year without impacting the status of your seasonal employees. The qualifications for seasonal employment are difficult to understand. If you have additional questions, please contact the Unemployment Insurance Liability Unit.
The Work Opportunity Tax Credit (WOTC) is a Federal tax credit available to employers for hiring individuals from certain targeted groups who have consistently faced significant barriers to employment.
WOTC joins other workforce programs that incentivize workplace diversity and facilitate access to good jobs for American workers.
The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) retroactively allows eligible employers to claim the Work Opportunity Tax Credit (WOTC) for all targeted group employee categories that were in effect prior to the enactment of the PATH Act, if the individual began or begins work for the employer after December 31, 2014 and before January 1, 2021. For tax-exempt employers, the PATH Act retroactively allows them to claim the WOTC for qualified veterans who begin work for the employer after December 31, 2014 and before January 1, 2021. The PATH Act also added a new targeted group category to include qualified long-term unemployment recipients.
Employers can hire eligible employees from the following target groups for WOTC.
An employer must obtain certification that an individual is a member of the targeted group, before the employer may claim the credit. An eligible employer must file Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” with their respective state workforce agency within 28 days after the eligible worker begins work. Employers should contact their individual state workforce agency with any specific processing questions for Forms 8850.
The credit is limited to the amount of the business income tax liability or social security tax owed. A taxable business may apply the credit against its business income tax liability, and the normal carry-back and carry-forward rules apply. See the instructions for Form 3800, “General Business Credit,” for more details.
For qualified tax-exempt organizations, the credit is limited to the amount of employer social security tax owed on wages paid to all employees for the period the credit is claimed.
Qualified tax-exempt organizations will claim the credit on Form 5884-C, “Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans,” as a credit against the employer’s share of Social Security tax. The credit will not affect the employer’s Social Security tax liability reported on the organization’s employment tax return.
After the required certification is secured, taxable employers claim the tax credit as a general business credit on Form 3800 against their income tax by filing the following:
Qualified tax-exempt organizations described in IRC Section 501(c) and exempt from taxation under IRC Section 501(a), may claim the credit for qualified veterans who begin work on or after December 31, 2014, and before January 1, 2021. After the required certification (Form 8850) is secured, tax-exempt employers claim the credit against the employer social security tax by separately filing Form 5884-C, “Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans.” File Form 5884-C after filing the related employment tax return for the period that the credit is claimed. The IRS recommends that qualified tax-exempt employers do not reduce their required deposits in anticipation of any credit. The credit will not affect the employer’s Social Security tax liability reported on the organization’s employment tax return. For more information, visit irs.gov.
The EITC is a special tax benefit for working people who earn low or moderate incomes. Small business owners can benefit as it can provide support to their employees and make the positions in their company more attractive and manageable for former welfare recipients. Low-income employees whose annual incomes are less than certain amounts may qualify to receive EITC. The dollar amounts to qualify for EITC change annually. The EITC may be available to single workers between the ages of 25 and 65 with no children in the home. It may also be available to all workers, regardless of age, if there are children in the home. Workers who have at least one qualifying child in the home may be eligible to receive a portion of credit in their regular paycheck. Income guidelines and further information on qualification can be obtained by visiting its website at irs.gov.
Advanced Earned Income Credit allows employees with at least one qualifying child to receive the credit throughout the year as part of their regular pay — AT NO ADDITIONAL COST TO THE EMPLOYER. To receive EITC advance payments, employees must simply complete Form W-5. Advance payments don’t cost employers money. Employers simply subtract the advance payments they have added to their workers’ paychecks from the total taxes withheld from all employees they would otherwise deposit with the IRS. Most employers with automated payroll systems can easily program advance payments into their systems.
Although employers may not be aware of the advance EITC payment option, any eligible employee who files a W-5 with an employer must be given advance payments. Employers are NOT required to make sure employees are eligible for the EITC – that is the employee’s responsibility. For more information, see the IRS Employer’s Tax Guide, Circular E.
Once you have determined that you will need employees in your business, you must invest the proper time and resources into establishing your personnel policies and finding the right people. You must also be aware of the federal and state regulations for employees.
While establishing written personnel policies may be time consuming, it can prevent significant aggravations and problems later. Your policy manual should address all the various issues you expect and don’t expect to arise in the normal operations of your business — both the good and the bad. However, written policies establish rights and responsibilities for your employees AND yourself. If you establish written policies, it is important that you also follow them (e.g. written warnings, review procedures, etc.). Issues that may be addressed by personnel policies include:
How many hours are to be worked per day, per week? Discuss evening, weekends, holidays, peak periods, etc. Remember all employees except salaried supervisors are entitled to receive overtime. Determine how you will allow employees time off for personal needs. Establish clear procedures for paid and unpaid time off for emergencies, family illnesses, jury duty, etc. The Family and Medical Leave Act requires all employers with 50 employees or more to provide up to 12 weeks of unpaid leave for births, adoptions and health care of immediate family members in a 12-month period.
Make sure your salaries are competitive with similar local businesses. Wages are a significant cost in operating your business. However, low wages can result in higher turnover and lower productivity. Establish clear vacation policies, including length and timing of vacation. Clearly define procedures for when two or more employees wish to go on vacation at the same time. Will you provide paid or unpaid vacations? Paid vacations are an expected basic benefit by many employees.
Consider offering your employees discounts, health insurance, pension plans, profit sharing and/or educational assistance. Fringe benefits can increase worker job satisfaction and productivity. If you provide benefits, determine which employees will receive them (e.g. all employees, only full-time employees, only management, etc.). You must have clear, written, non-discriminatory policies for all fringe benefits. See the Liabilities and Insurance section of this book for more information about health insurance. If your business requires skilled, professional employees and/or you desire to establish a long-term employment relationship, a pension plan and/or health insurance may be a requirement to achieve employee loyalty and commitment. If you offer a pension plan, it must meet the requirements of ERISA (Employee Retirement Income Security Act). General information on ERISA can be obtained from the U.S. Department of Labor, Pension and Welfare Benefits Administration.
Expect and plan for conflicts with your employees. Plan and establish grievance procedures. Outline your policy for probationary employment, period review, promotions and raises. Clearly document the steps to be used to resolve conflicts and then follow them and document your actions in writing. Establish clear policies for such matters as layoffs, seniority rights, severance pay, etc.
Is your business involved in a very competitive environment or does it work on confidential research? Should key employees be required to sign legally enforceable non-competition agreements? Do you have all employee and independent contractors sign non-disclosure agreements relating to confidential information? Do you clearly state that any ideas and inventions developed by employees and independent contractors working for your company are the property of your company? Your written personnel policies should be reviewed by an attorney to determine enforceability, compliance with state and federal employment laws and to ensure that they do not unduly increase your own liability. Each employee should receive a copy of your personnel policies upon hiring. Explain verbally any critical parts of your employment policies. Verify that each employee fully understands the document.
Once you have made your employee selection(s), you will need to familiarize yourself with the federal and state employee regulations. The Colorado Department of Labor and Employment regulates wages, hours and working conditions for employees.
State minimum wage is $11.10 effective January 1, 2019. Minimum wage must be paid to all employees and emancipated minors whether employed on an hourly, piecework, commission, time, task, training or other basis.
At least 1 1/2 times the employee’s regular rate of pay must be paid for all hours worked over 40 in one work week. In addition, State law requires overtime pay for any work after 12 consecutive hours. For more information regarding work hours and overtime, visit the Colorado Division of Labor, Labor Standards Office website at coworkforce.com.
Pursuant to The Fair Labor Standards Act (FLSA), whenever both laws apply and FLSA differs with Colorado law, the law providing more protection or setting the higher standard applies.
Employees working in the retail and service, commercial service, food and beverage and health and medical industries are covered by the work order 22 and shall be permitted breaks and meal periods during the workday. The law requires at least a 10-minute break every four hours (or a major fraction thereof). A half-hour meal period is required for any shift exceeding five hours.
You must have a federal employer identification number (FEIN) when you are an employer. You will use this number to make your federal tax deposits and when you file your employment tax returns. You can obtain your FEIN by applying online at irs.gov.
There are other times when you must have a FEIN, such as when you have formed a corporation or a partnership. Your bank may also ask for an FEIN when you open a business bank account. If you are a sole proprietor, you are not required to have a FEIN.
The CR100 is a two-part form which may be used to open accounts. If you will have employees, this form will open your state wage withholding account with the Colorado Department of Revenue.
One form that you must keep in your employees’ personnel file(s) is the Immigration and Naturalization Service’s I-9 Form. This paperwork was devised to ensure that employers do not hire illegal aliens. The paperwork is not difficult and is required. The I-9 Form must be completed within three working days after employment begins. Employees must submit documentation that verifies residency to their employer. All documentation unavailable on the hire date must be obtained within 21 days. The form lists a variety of different forms of identification that may be used individually or in combination to verify eligibility to work in the United States. The penalties for failing to comply with this requirement begin at $250 for each unauthorized employee and can quickly reach $10,000 per violation. For further information regarding the I-9 Form, contact the INS.
Each employee must date and sign a completed W-4, “Employee’s Withholding Allowance Certificate.” You should include it in every employee’s personnel file as it will provide a record of his/her proper name, address and social security number. The W-4 provides you with information regarding the employee’s marital status and the number of exemptions claimed to determine the proper federal and state income tax withholdings from your employee’s payroll checks. Maintaining this form on file is not only a requirement of the IRS but may also be used as evidence in disputes that arise with the IRS or employees. The W-4 must be filed with the IRS only in special circumstances, which is explained in Publication #15, “Employer’s Tax Guide.” If any of your employees claim exempt status, including students, they must fill out a new W-4 every year. Regular employees should fill out a new W-4 whenever they move or there is a change in their tax status (i.e., got married or divorced, increase/decrease dependents or changed the number of their exemptions). All employers in the State of Colorado must report a newly hired employee to the Division of Child Support Enforcement.
A copy of the new employee’s W-4 or a new hire report must be sent to the State Directory of New Hires in Denver within 20 days of the employee’s date of hire or, at the option of the employer, on the first payroll after the 20 days have expired. This new report will be used to identify parents who are delinquent on child support payments. For more information on new hire reporting, contact the Colorado State Directory of New Hires online at newhire.state.co.us.
The Internal Revenue Services Small Business Tax Education Program (STEP) is a cooperative effort with the local organizations to provide business tax education to the small business owner. Check into the IRS Small Business Tax Education program in your area and take the first step to making your taxes less taxing! Call 800-829-1040.
If you have employees, you will be responsible for withholding federal income taxes and Social Security/Medicare taxes from your employees’ wages. As the employer, you must pay an equal share of Social Security/Medicare taxes. Circular E, the federal “Employer’s Tax Guide,” is updated annually and should be used to determine the correct tax amounts. The amount of taxes withheld will determine how often you must deposit the taxes into your bank account. Deposits may be made at a Federal Deposit Bank, using Form 8109, or you may use the Electronic Federal Tax Payment System (EFTPS). EFTPS is similar to automatic bill payment. To get more information or to enroll in EFTPS, visit eftps.gov.
Some employers are required to use EFTPS; you will be notified if this applies to you. At the end of each quarter, you must file Form 941 to report total wages paid, taxes withheld and due and taxes deposited. If you have employees, you must withhold Colorado withholding tax from all employees working in Colorado, including non-residents. DRP 1098, “Colorado Income Tax Withholding Tables,” should be used to determine the proper withholding rates for your employees. The state requires that once you have collected more than $400 in state wage withholdings, you must file the total collected with the state when you file your next federal return. If, at the end of a quarter, you have still not collected $400 in wage withholdings, you must file with the state regardless of the amount due. If you annually withhold more than $50,000 in state wage withholding, you must file via Electronic Funds Transfer (EFT). If you annually withhold less than $50,000, you may elect to file via EFT or file coupon Form DR 1094 with a check or money order. You may also file and pay online at mybiz.colorado.gov.
Unemployment insurance is a fund established by law to provide benefits to employees who lose their jobs through no fault of their own. Several factors determine the amount of benefits that are paid every two weeks to eligible persons actively seeking employment. As an employer, you will be required to pay both state and federal unemployment insurance taxes. An employer must pay unemployment insurance tax on wages paid to all employees, including corporate officers. The federal unemployment insurance rate is 6.2 percent on the first $7,000 in wages paid to each employee every year. However, as a new employer, you should qualify for a 5.4 percent credit for an effective rate of 0.8 percent. If your federal unemployment tax liability is over $100 at the end of any quarter, you must make a deposit of the amount due. Use Form 8109 or the EFTPS system described earlier. If your liability is less than $100, the liability may be carried over and added to the next quarter. At the end of the calendar year, you must file Form 940 or 940EZ to report your total unemployment tax liability for the year. If your liability at the end of the calendar year is less than $100, you may deposit it or pay it with Form 940. Form 940 and your final unemployment tax payment are due by January 31.
All Colorado employers must also pay state unemployment insurance tax. The first $10,000 in wages paid to each employee during every calendar year is subject to state unemployment insurance tax. The current state unemployment insurance tax rate for new businesses is 1.7 percent plus a surcharge percentage. (NOTE: Some industries may pay a higher rate, such as construction trades.) You must file Form UITR-1, “Unemployment Insurance Tax Report,” and UITR-1(a), “Unemployment Insurance Report of Workers Wages,” every quarter, regardless of the amount of unemployment tax due. At the end of each year, you will receive notice of your tax rate for the next calendar year based on your business’ unemployment claims history. If you purchase an existing business, you may acquire that business’ experience rating and be liable for any delinquent unemployment insurance taxes. You may receive credit for taxes paid by the previous owner on employees during the current year. For more information on forms or optional reporting methods, contact the Department of Labor and Employment, Unemployment Insurance.
The Unemployment Insurance Division offers educational seminars to raise awareness and educate employers about the state’s unemployment insurance system. Seminars cover a variety of topics and are scheduled for two hours in length, including time for Q&A. For more information or to register for an upcoming seminar, email firstname.lastname@example.org.
The Colorado Department of Labor and Employment can also provide a written advisory opinion concerning the classification of a worker, upon request. Click on the Request an Advisory Opinion button at colorado.gov/pacific/cdle/ensure-proper-worker-classification.
Occupational privledge tax is often referred to as the “head tax” on individuals who work within the limits of certain cities. This tax is collected through employer and employee contributions. You must pay the employer a portion of the tax on yourself regardless of whether you are a sole proprietor, partnership or corporation. If your business is located within the limits of a city that requires this tax, you must set up an account through the city clerk’s office. Make sure to find out about your city requirements. Contact your city clerk for more information.
At the end of the year, you are responsible for reporting wage and tax withholding information with the W-2 forms (Wage and Tax Statement). Copies of the W-2 must be sent to your employees no later than January 31. Copy A of Form W-2 must be sent to the Social Security Administration (SSA) by February 28 with Form W-3. If you file 250 or more form W-2s, you must file the information with the SSA via magnetic media. For your Colorado employees, you must file DR 1093, “Annual Transmittal of State W-2 Forms.” If you file 250 or more form W-2s, you must report W-2 information to the state via the Withholding Online system at mybiz.colorado.gov. The due date for W-2 submission using the “WHO” system is March 31. For more information, contact the Colorado Department of Revenue via e-mail at email@example.com. Additional information is available at colorado.gov/tax and FYI WITHHOLDING 6.
If you have determined that your workers are independent contractors, you are not required to withhold or pay any taxes on their behalf. However, you must keep track of how much you pay them and file Form 1099 Miscellaneous for each person to whom you paid $600 or more during the year. The independent contractor must be sent her/his Form 1099s Miscellaneous by January 31. Copy A of Form 1099s must be sent to the IRS by February 28 with Form 1096 “Annual Summary and Transmittal of U.S. Information Return.” If you file 250 or more Form 1099s, you must file via magnetic media. To order 1099s, visit irs.gov.
It is important to keep complete and accurate employee/payroll records and to retain the records for at least five years. The IRS, Immigration and Naturalization Service, Colorado Department of Revenue and Colorado Department of Labor and Employment all have the authority to audit your records. Remember, your responsibilities begin as soon as you hire an employee.
All public and private employers in Colorado, with limited exceptions, must provide workers’ compensation coverage for their employees if one or more full- or part-time persons are employed. A person hired to perform services for pay is presumed by law to be an employee. This includes all persons elected or appointed to public sector service and all persons appointed or hired by private employers for remuneration. There are a few exemptions to this definition.
Workers’ compensation insurance coverage is paid by the employer. Employers purchase insurance coverage through a commercial insurance carrier or, if qualified, through self-insurance programs. No portion of the premium may be deducted from an employee’s wages.
In Colorado, there are three ways in which an employer may obtain workers’ compensation coverage:
In Colorado, the employer or insurance company has the right in the first instance to select the physician who attends to an injured employee. This becomes the designated medical provider.
When selecting the designated physician, it is extremely important to assure that you are furnishing the best medical care possible. Quality and appropriate medical care is important in cost containment and minimizing the effects of an injury to an employee. Be sure to check with your insurance company. They may have established preferred provider networks that can save additional medical expense.
The statute requires, with some exceptions, that a list of at least four physicians, corporate medical providers or a combination of both (where available) be provided by the employer so as to afford the injured employee the opportunity to select a treating physician. At least one of the designated providers must be at a distinct location from the other three and have distinct ownership.
If no physician is properly designated, the employee may attend the health care provider of his or her choice.
All accidents should be investigated to ensure that all pertinent facts are gathered and available if the insurance company has any questions regarding the claim. Establish communication early with the insurance company. This communication should be maintained until the conclusion of the claim. The law requires an employer to notify the insurance company of an injury within 10 days, no matter how minor the injury. This is done by filing an Employer’s First Report of Injury form. Filing the Employer’s First Report of Injury is not necessarily an admission that you agree with the facts of the incident. It is a statement that the employee is making a claim. If the employer questions whether an injury is work related, this should be documented and filed with the first report form. Timely filing is critical because the carrier cannot pay compensation benefits or medical bills until it has knowledge of the injury and has the opportunity to evaluate liability. Failure of the employer to file this report in a timely manner may result in penalties against the employer. Notice of a fatality or an accident in which three or more employees are injured should be given immediately.
By law, the injured worker must notify the employer in writing within four working days of an injury. If the injured employee does not notify the employer within this time frame and the employer posted the proper notice, the worker still may receive benefits, but there may be a penalty for not reporting timely.
The insurer sends the Employer’s First Report of Injury to the Division of Workers’ Compensation. This report initiates the claim. Your insurance company should provide you with copies of this form and help you complete the form. If you do not know where to report, check with your insurer. Some insurers may have systems for filing by telephone or electronic format. Your insurer will provide you with information on how to file this report.
In most cases, the management of workers’ compensation claims in an efficient manner is dependent on the insurer receiving complete, factual information on the Employer’s First Report of Injury.
Wages are defined in the Workers’ Compensation Act as the money (including overtime) rate at which an employee is paid at the time of injury. Wages include:
No per diem payment shall be considered as wages unless it is also considered wages for federal income tax purposes. The fringe benefits are only computed into the wage replacement when the employer no longer pays the fringe benefit during any time the employee is receiving temporary disability benefits.
Complete the section of the Employer’s First Report of Injury that deals with wages very carefully. The section for Average Weekly Wage (AWW) is used to determine compensation benefits for the employee. An Average Weekly Wage Worksheet can be obtained from your insurer to help you calculate the AWW. Examples:
Where an employee is paid for piecework, tonnage, commission or any basis other than mentioned above, the total amount earned in the 12 months prior to the injury is divided by the number of pay periods the injured employee was employed during this 12-month period. Where an employee is paid by the mile, calculation of mileage for AWW purposes is limited to the average number of miles per day driven in the 60 working days preceding the injury. This is multiplied by the rate per mile to arrive at a daily wage.
If one of the above methods is insufficient to determine a fair AWW due to the nature of the employment, the Division may determine a fair AWW using another method. Your insurer can help with questions regarding calculation of average weekly wage.
The Division of Workers’ Compensation partners with employers to protect and promote the integrity, vitality and safety of Colorado’s workforce environment through the Premium Cost Containment Program. Through this program, employers will find ways to control workforce injuries and insurance-related costs and insurers will learn about the required premium discount for certified Safety and Loss Control Programs.
An employer can become certified by applying to the Premium Cost Containment Board and documenting that there has been a qualified risk management program in force for at least one full year. Certified employers are eligible for up to a 10 percent reduction in workers’ compensation insurance premiums.
If a person willfully makes a false statement or representation material to a Workers’ Compensation claim for the purpose of obtaining benefits, payments, compensation or awards, such person commits a class 5 felony, punishable as provided in §18-1-105 C.R.S.
To be convicted of Workers’ Compensation fraud in Colorado, it must be proved that material false statements or representations were made.
In order for the Workers’ Compensation Fraud Investigation Unit to build a prosecutable case, it must be able to prove:
1. The statements or representations made are false
2. Claim decisions were made based on false statements or representations material to the claim
3. The statements or representations were made with intent to defraud
Possible “red flags” of fraudulent behavior may include:
Insurers are required to conduct a survey of injured workers’ satisfaction within 30 days after a claim is closed. The survey asks injured workers to respond to questions on courtesy, promptness of medical care and promptness of handling and resolving the claim, as well as overall satisfaction with the insurer. You can access the “Injured Worker Exit and Change of Physician Surveys” results at colorado.gov/pacific/cdle/injured-worker-exit-and-change-physician-surveys.
The Occupational Safety and Health Administration (OSHA) is charged with the responsibility to:
OSHA safety and health standards fall into four major categories: general industry, maritime, construction and agriculture. Standards are published in the Code of Federal Regulations (CFR), Title 29, Part 1900-1999. Business owners should consult the CFR, which is available at many public libraries and OSHA. Employers may ask OSHA for a variance from a standard or regulation if they can demonstrate that their workplace conditions and practices are at least as effective as those required by OSHA.
With the exception of some exempt industries, employers of 11 or more employees must maintain updated records of occupational injuries. Employers with 10 or fewer employees are exempt unless selected by the Bureau of Labor Statistics or OSHA. Small employers who are selected to maintain records will be notified in advance and supplied the necessary forms and instruction.
Recordkeeping-exempt employers must still comply with all other OSHA Standards, including the display of the OSHA poster, reporting within eight hours an accident that results in one or more fatalities or the hospitalization of three or more employees.
OSHA has the authority to enforce safety and health standards and to conduct unannounced workplace inspections. “Upon presenting the appropriate credentials to the owner, operator or agent in charge” of a business, an OSHA compliance officer is authorized to enter during regular working hours without delay, to inspect all areas where work is performed. Inspections must take place at “reasonable times and within reasonable limits.” The inspection may include private interviews with the owner, operator and/or any employee. After the compliance officer completes his report, the area director determines what citations, if any, will be issued, and what penalties, if any, will be proposed.
Colorado State University (CSU) offers free OSHA consultation services. Program staff are experienced professional safety and industrial hygiene consultants trained to identify safety and health hazards in your workplace. They offer recommendations to reduce or eliminate hazards. Their purpose is to help businesses meet the OSHA job regulation standards and develop an ongoing, effective safety and health program. They will provide confidential, comprehensive written reports containing their findings and recommendations. Follow-up services are available as necessary. CSU consultants do not issue citation penalties for OSHA violations. Because the program is funded by OSHA, consultants are required to notify OSHA only in instances of refusal to correct serious violations within a reasonable amount of time. The primary aim is to assist responsible small employers in establishing safe and healthful working environments. For more information, contact Colorado State University, Occupational Health and Safety Section. OSHA continuously strives to provide positive programs to help businesses comply with regulations and tries to avoid issuing citations and fines. Employers are encouraged to contact OSHA directly for the most up-to-date information regarding consultation services and voluntary compliance programs.
OSHA also enforces Employee “Right to Know” laws which apply to all businesses with employees such as contractors, manufacturers or industrial processors who routinely work with hazardous chemicals. The law is intended to make sure that all hazardous and toxic chemicals that are produced, imported or used in the workplace are properly evaluated. If they pose a hazard to employees, employees must be notified through a “Hazard Communication Program.” The goal of the law is to reduce the growing number of injuries, illnesses and deaths caused by exposure to hazardous chemicals in the workplace.
If you are not sure if your business is covered by the law or to obtain specific information on the requirements for developing a “Hazard Communications Program,” you should contact the U.S. Department of Labor, Occupational Safety and Health Administration.
Once you have established your employment policies and procedures, you must clearly define the type of employee(s) you are seeking and their specific job responsibilities. Determine the lowest level of education, experience and skills you can accept. Be certain you know what skills are necessary to do the job. How much training are you willing to provide? Each employment situation is unique. What may work for one business or even one specific job opportunity may not work for the next situation. Advertising in the local paper and/online, registering with a trade organization or hiring an employment agency are all viable options in different situations. The Colorado Department of Labor and Employment administers more than 30 local Workforce Centers. They help match the right employee with the right employer. Federal and state civil rights laws prohibit discrimination in employment based upon race/color, creed/religion, national origin/ancestry, sex, age and disability. Also prohibited is discrimination based on marriage to a co-worker (companies with 26 or more employees). Colorado law and the Americans with Disabilities Act (ADA) prohibit discrimination based on physical or mental disabilities. The Employer Responsibilities section contains additional information about state disability discrimination laws and the ADA.
Your written application and interview are important tools in selecting the best applicant for the job. The Colorado Civil Rights Division has staff to answer questions about all aspects of fair employment laws. It also publishes an informative brochure titled “Preventing Job Discrimination,” which is a useful guide to avoiding discriminatory questions during the hiring process. Contact the Division via e-mail at firstname.lastname@example.org. Within the limits established by law, your goal is to find out as much as possible about each applicant including education, professional background, work habits and skills, their interest in your position and their short- and long-term goals. Ask questions about the applicant’s previous job and why they left. If you’re looking for someone who can work alone, does the applicant have the proper aptitude? If you’re looking for a “team player,” will the applicant complement the other members of the team? Evaluate the applicant’s responses, written and verbal. Are they evasive or contradictory? Do they have the necessary skills for the job? Are they prepared to give you the commitment you desire regarding such issues a overtime, weekend work, travel, etc.? After the interview is over, encourage the applicant to keep in contact with you. Never commit yourself to a specific applicant until all applicants have been interviewed. Verify all information and references on the application. Request information in writing if you desire a written response. Now make your selection! Remember, the right employee will make you money. The wrong employee will cost you money, time, materials and even customers.
There are numerous state and federal posting requirements for employers. Some may only apply under certain circumstances, but several are required in all situations. Posters may be obtained free from the following agencies or may be purchased in combinations from many office supply companies.
Anti-Discrimination Colorado Division of Civil Rights
1560 Broadway, Suite 1050
Denver, CO 80202
Polygraph Protection Act, Federal Minimum Wage, Family & Medical Leave Act
U.S. Dept. of Labor Wage-Hour Division
1999 Broadway Suite 710
Denver, CO 80202
State Minimum Wage
Colorado Division of Labor Labor Standards Unit
Occupational Safety Occupation Safety & Health Administration (OSHA)
1391 Speer Blvd. Suite 210
Denver, CO 80204
Equal Employment Opportunity Equal Employment Opportunity Commission (EEOC)
PO Box 12549
Cincinnati, OH 45312
Unemployment Insurance Division of Employment and Training
For Workers’ Compensation Posters , contact your workers’ compensation insurance carrier. You should prepare and post the following notice in 1/2 inch letters:
“If injured on the job, written notice must be given to your employer within four working days of the accident, pursuant to section 8-43-102(1) CRS.”
Employers are also required to post or notify workers in writing regarding when and where they will be paid.
As your business grows you may start asking yourself if you should hire full or part-time employees, or hire subcontractors to perform specific jobs on an as-needed basis.
Common law employees are individuals who perform services subject to the control of an employer regarding what, where, when and how something must be done.
Persons who follow a trade, business or professions such as lawyers, accountants or construction contractors who offer their services to the general public are usually considered independent contractors.
Commissioned delivery drivers, insurance agents, full-time commissioned sales agents of products for resale or for use in the buyer’s business operation, and individuals who do piece work with materials supplied by the employer are considered statutory employees by the IRS.
The EITC is a special tax benefit for working people who earn low or moderate incomes.
Once you have determined that you will need employees in your business, you must invest the proper time and resources into establishing your personnel policies and finding the right people.
Once you have made your employee selection(s) you will need to familiarize yourself with the federal and state employee regulations.
You must have a federal employer identification number (FEIN) when you are an employer. You will use this number to make your federal tax deposits, and when you file your employment tax returns.
If you have employees, you will be responsible for withholding federal income taxes and Social Security/Medicare taxes from your employees’ wages.
All public and private employers in Colorado, with limited exceptions, must provide workers’ compensation coverage for their employees if one or more full- or part-time persons are employed.
OSHA safety and health standards fall into four major categories — general industry, maritime, and construction and agriculture.
There are numerous state and federal posting requirements for employers. Some may only apply under certain circumstances, but several are required in all situations.
Once you have established your employment policies and procedures, you must clearly define the type of employee(s) you are seeking and their specific job responsibilities.