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Special Employment Situations

Commission and Piecework Employees

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, that the individual will perform the service on a continuing basis and that 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 Colorado Division of Workers’ Compensation directly regarding your workers’ compensation liability. To order W-2’s and 1099’s, contact the IRS.

Children and Spouses

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.

Corporate Officers

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.

Churches and Charitable Organizations

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. 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.

Leased Employees

An alternative to hiring your own employees is to contract for 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. Please contact the Unemployment Insurance Liability Unit at www.colorado.gov/CDLE.com.

Household Employees

If you hire someone to work in your own home, you may have responsibilities as a household employer. If the employee earns over $1,300 per year, you are responsible for social security and Medicare taxes. If the employee earns over $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 s/he completes Form W-4. A W-2 must be given to the employee and submitted social security. 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.”

Seasonal Employees

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 & 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 and no more than 25% 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% 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.

Tax Credits for Creating Jobs for Welfare Recipients

The state and federal government offer tax credits to businesses that offer employment to individuals receiving public assistance. NOTE: The Welfare to Work Tax Credit has been extended to those employees who start work prior to January 1, 2002. Federal tax credits can and do change periodically. They may be enacted or extended as dictated by Congress and Executive Order. It is advised that you check with the IRS for any changes in credits you are interested in claiming. The State of Colorado allows employer to claim a credit of 20% of their annual costs for voluntarily providing “eligible services” for the employees who have received public assistance pursuant to the “Colorado Works Program,” 39-22- 521(1), CRS. “Eligible services” include assistance with childcare, health/dental insurance benefits, job training and transportation. The credit is limited to expenditures made on an eligible employee during the first two years of his/her employment. For more information, contact the Colorado Department of Revenue and request FYI Income 34, “Colorado Works Program Credit,”.

The Welfare-to-Work Tax Credit (WOTC) is a federal income tax credit that encourages employers to hire long-term welfare recipients who begin work prior to January 1, 2002. This “new” taxcredit can reduce employer federal tax liability by as much as $8,500 per new hire. To qualify, new employees must work at least 400 hours or 180 days and must be long-term welfare recipients (longer than 18 consecutive months). The tax credit is 35% of “qualified wages” during the first year of employment and 50% for the second year. Qualified wages are capped at $10,000 per year but may include tax-exempt amounts under accident or health plans, as well as educational assistance and dependent assistance programs. An employer must apply for and receive certification from the state Welfare Opportunities Tax Credit (WOTC) coordinator that a new hire is a long-term AFDC or TANF recipient before the employer can claim the Welfare-to-Work Tax Credit. Federal tax credits can and do change periodically. They may be enacted or extended as dictated by Congress and Executive Order. It is advised that you check with the IRS for any changes and credits you are interested in claiming.

To apply:

  • Complete IRS Form 8850, “Pre-Screening Notice and Certification Request for Work Opportunity and Welfare-to-Work Tax Credits” by the date the job offer is made.
  • Complete either U.S. Department of Labor ETA Form 9062, “Conditional Certification Form,” if provided to the job seeker by a participating agency or ETA Form 9061, Individual Characteristics Form,” if the job seeker has not been given a conditional certificate form.
  • Mail the IRS Form 8550 and either ETA Form 9062 or 9061 to the Colorado WOTC Coordinator within 21 days of new hire’s start date. Contact the Colorado WOTC Coordinator or visit them at 633 17th Street, Suite 700, Denver, CO 80202. For more information and to obtain the necessary forms, refer to the Welfare to- Work website at www.doleta.gov.