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I have a fledgling one-person start up. I’ve been using some 1099 contractors when I get more work in a time period than I can handle.

I’m bringing on a 1099 contractor that will have regular hours each week. The person I’ve selected wants their taxes auto withheld on their check (paid for by the 1099, but auto withheld for them like a w2 emp). I’ve seen ADP payroll processed checks that do this, but don’t know the process to do this.

What is the best/cheapest way to auto withhold and submit their taxes for them? Are there any reasonably priced services for a small business that won't have more than three people on payroll in the next 12 months.

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2 Answers

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If the person is a 1099 contractor, you generally don't withhold taxes from the compensation you pay them. They should make estimated tax payments to the IRS and state authorities. To make federal tax payments easier, the IRS has a service called EFTPS (www.eftps.gov), which will allow the contractor to make payments directly out of his or her bank account.

Different rules may apply if the person is a non-resident alien or is subject to backup withholding. Please contact me if you need more information. www.ninjatax.com

In accordance with Treasury Circular 230 (31 CFR part 10), please note: any information contained in this post is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.

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@NinjaTax They want the tax automatically taken care of for them like ADP offers with their 1099 payroll service. My wife works as a 1099 and that feature makes it effortless for her. www.eftps.gov looks nice, now I can point them to a no-cost federal website instead of printing out the IRS forms and descriptions for them. Thanks. – SeripisChad Nov 18 at 16:26
@NinjaTax Keep up the great answers! Did you by chance recieve the email I sent you? – Fred Imparatta♦ Nov 18 at 16:41
@Fred I did get your e-mail -- I sent you a response -- perhaps it ended up in your Spam box? – NinjaTax Nov 19 at 16:24
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This is what you need to do.

Determine your gross pay, either by multiplying your hourly rate of pay times the number of hours you work or by looking to your weekly salary.

Deduct your Social Security taxes by multiplying your gross pay by 6.2 percent (2009) and subtracting that number. If you receive $500 a week, you would thus need to deduct $31. Social Security taxes are capped at $106,800 annually, meaning once your gross annual pay rate reaches that figure, you no longer need to have Social Security deducted.

Take out Medicare taxes of 1.45% from your gross pay. Using the $500 example, you would deduct $7.25.

Determine your federal income tax withholding by first considering your marital status and your allowable deductions. If you are single, claiming a deduction of one, and are paid weekly, from that same $500, you would deduct $50, according to IRS Publication 15.

Deduct your state income tax. Income tax rates are determined by states and range from zero in Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Tennessee, Washington and Wyoming to 11.8 percent in New Jersey and 11.7 percent in New York.

Deduct city taxes. While this is a less likely tax, if you work and live in New York City, you can expect to dole out more of your income to the Big Apple. Refer to the city government for exact rates.

If you want to learn more about this topic check this website out.

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