It’s a common misconception that a person working fewer than 40 hours a week is not a full employee. The reality is that a temporary employee, seasonal employee, or part-time employee is still an employee! And the IRS will still expect you and that employee to pay taxes. This issue comes up quite a bit during the summer and seasonal months when businesses are hiring part-time workers. Businesses need to be aware that if they’re hiring help, they need to understand tax filing and withholding responsibilities. Otherwise, they may face penalties later in the year. Let’s look at some of the tax withholding rules for seasons and part-time employees.
According to the IRS, seasonal and part-time employees are subject to the same federal income tax withholding, Social Security, and Medicare tax rules as other employees. Employers must withhold and pay employment taxes on wages paid to these workers. That being said, business owners who employ seasonal employers generally do not have to file Form 941, Employer’s Quarterly Federal Tax Return, for quarters in which they did not have employees on payroll.
To make sure a business does not come under IRS scrutiny for the non-payment of seasonal employees during off seasons, an employer can let the IRS know they may not file a return for certain quarters by checking the “seasonal employer” box in Part 3 of every Form 941 filed. If this box is checked and at least one taxable return is filed during the year, the IRS generally will not inquire about quarters for which no return was filed.
California business owners not only need to be sure they are paying taxes on part-time employees, but they also need to classify them correctly as employees — even if they are only seasonal. Just because an employee is part-time or seasonal, they are still considered an employee and they should not be classified as a “gig worker” or independent contractor. Otherwise, you run the risk of being audited by the California Employment Development Department (EDD).
EDD audits are focused on reclassifying independent contractors to employees. This audit will include a review of business records for the past three years, specifically records with special interest on documentation about your employees and independent contractors. After a worker is reclassified to an employee, the business will be assessed taxes, penalties, and interest.
Additionally, the EDD can collect from the responsible party. Again, just because an employee may be seasonal or working less than 40, or even 20, hours a week, they are still an employee and taxes must be paid for them. To protect yourself and your business, and avoid an EDD audit, make sure the classification of employees is done correctly during payroll taxes.
Remember that just because an employee is temporary, part-time or seasonal, they are still an employee and taxes need to be collected and filed for all of them. When it comes to employees and taxes, the IRS does not discriminate — even if the person is only employed for a month. This is the same with state taxes, especially California where employees also need to be classified correctly to avoid a potential EDD audit. Always work with an experienced California tax attorney or professional who can help you navigate all your employee tax and classification needs.
Allison Soares is a partner and tax attorney at Vanst Law LLP. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits from San Francisco to San Diego.
