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August 17, 2020


What does employee classification have to do with payroll taxes?

If you own a business with employees here in Texas, how you treat your workers for pay and tax purposes makes a difference to the IRS. You may be wondering why it matters to the agency since it is ordinarily the Department of Labor that addresses issues regarding employee classification. That is true, but if you misclassify your employees, you are probably not properly making payroll tax deductions and payments.

The IRS is actively searching for companies that have failed to pay the appropriate amount of payroll taxes. In order to avoid an audit and/or formal accusations relating to this issue, you may want to make sure you properly classify your employees as either exempt or nonexempt. The Fair Labor Standards Act addresses this issue since workers you pay by the hour are eligible for overtime, which affects the tax you and the employee pay.

A yearly income of less than $23,000 is a good indication that a worker is nonexempt and, therefore, entitled to overtime pay. If you pay an employee more than $100,000 per year, the FLSA assumes that he or she is exempt. If you pay someone who works for you anywhere in between these amounts, properly classifying him or her can become a bit tricky. The performance of managerial or administrative duties often indicates an employee is exempt, and a lack of these duties usually means he or she is non-exempt. It is in the definitions of these duties where the waters may get murky.

In order to ensure that your company is not in violation of federal law and is paying the appropriate taxes, it would be a good idea to consult with an experienced Texas tax attorney as you create the positions in your company. You may also want to review the employee classification of everyone who works for you just in case. Even though an employment audit does not mean you will face any penalties, if you can avoid this eventuality altogether, it would certainly simplify your life.