Payroll Virginia, Unique Aspects of Virginia Payroll Law and Practice
If you’ve ever been confused about the intricacies of payroll law in Virginia, we are here to help! In this post, we will go over the unique aspects of Virginia payroll law and practice that make it different from most other states. We will also provide information about some things people usually do wrong with regard to their employees and payroll.
We want to assure you that by following these guidelines, you can avoid a lot of the mistakes that many people make when it comes to how they set up employee schedules, what they classify those employees as for tax purposes, and how much money they owe in taxes. Keep in mind that even if you are not aware of all the tips mentioned, you can still help your employees by ensuring that they are properly classified for tax purposes and by paying them on time.
Federal Unemployment Taxes
There is a Federal unemployment tax that applies to Virginia employers with over 25 employees. The purpose of this tax is to reduce the amount of unemployment compensation benefits that will be paid out to some of these employees. This program was first created in 1932. During the Great Recession (which began in 2008), the federal government increased this rate from 0.4% to 0.7%. The maximum rate that can be charged is the full-time equivalent rate which means that an employer with 25 employees must pay up to 0.7% of wages paid for every employee over 16 years of age. The minimum tax liability is .04% per employee, however, this tax goes away if the unemployment compensation claimant gets a job. The Department of Labor Office in Lynchburg conducts audits to ensure compliance with unemployment taxes.
Employer’s Deductions for Federal Payroll Taxes
The IRS requires that employers deduct federal taxes from employees’ paychecks and send these withheld funds to the IRS (at least) quarterly. These taxes include the Social Security tax, Medicare tax, and the federal income tax.
Social Security Tax
A 6.2% payroll tax is withheld from an employee’s paycheck. This is paid by the employer with no match paid by the employee. This amount changes each year to keep pace with inflation and other economic conditions that Congress may be aware of in any given year. Social security taxes are paid (and withheld) for both employees and employers. Employees must also pay half of this amount through withholding on their income taxes at the end of each year (or quarter in some cases). The Social Security tax rate changes every January 1st.
Medicare Tax
Unlike the Social Security tax, the Medicare tax is only withheld from an employee’s paycheck (not from the employer’s). The current rate for this tax is 1.45%. This amount changes every January 1st. This is not a match paid by the employer; it is paid by the employee. Employees must also pay a portion of this every April 15th through withholding on their income taxes. Employers are not required to withhold federal income taxes from an employee’s paychecks because most employees have an opportunity to save money before they file their annual income tax returns and therefore reduce how much in taxes they owe.
Federal Income Tax (FIT)
Employers are required to withhold federal income taxes at the rate of 6.2% from an employee’s paycheck. As we mentioned before, this amount is known as the FIT and it is paid by both the employee and employer. Employers must also withhold Virginia state income taxes from paychecks, but they are only required to do so if there is $1,000 or more in wages (this figure changes each year). The FIT can both be paid by the employer with no matching contribution by the employee AND be paid by employees themselves through withholding on their net pay before they file their federal income tax return each year.
Employee Classification
Most states require employers to classify each of their employees as either “employees” or “independent contractors.” Some states also provide rules for how an employer may classify an employee if the employer determines that it makes more sense for that employee to be classified as a “non-employee” or as a “commissioned salesperson.” Virginia is one such state because the Virginian Statute provides that certain persons required to be classified as employees are not expressly required to file W-4s, nor are they expressly required to be covered under unemployment benefits. The following are some of the basic criteria that an employer must consider when determining whether a worker should be classified as an employee or independent contractor.
Control over when, where, and how work is done
Method of payment (i.e., payroll vs. contract vs. commission)
Chance of profit or loss from work performed
Credentials to perform the work for which services are hired (e.g., licenses, diplomas, degrees)
Right to fire worker at will and/or hire new workers at will; term of employment for permanent job opportunities; long-term uncertain nature of project’s outcome; etc.
Right to hire his own employees or subcontract work; method of payment for work performed by a worker’s employees, etc.
How can you tell the difference? If you have the right to control someone else’s work, he is likely an employee and not an independent contractor. The IRS has a 20-point checklist that they use when deciding whether to classify an employee or independent contractor. They call it their common law test and it is used in classifying employees so that they can be properly taxed. Each state may differ from this approach, but most closely follow the federal guidance on these issues.
Why is this important? If an employer classifies an employee as an independent contractor with no withholding and no Medicare/Social Security tax, the employer will face serious penalties if the IRS finds that the worker was actually an employee. There are also other issues to consider. Independent contractors not only pay their own income taxes but they are responsible for paying all of their own payroll taxes, too. In addition, employers may face fines unless they keep adequate records proving how they treated each of their workers.
For more information about any of these topics or for assistance determining whether you should file for unemployment insurance, contact our office today to schedule a consultation with one of our experienced professionals.
Conclusion
As you can see from this discussion, there is a huge variety of employment-related issues that employers must consider when running their business. This information only scratches the surface of all that you should know about employment law and how to stay within the law and be compliant with your obligations as an employer. If you have questions or concerns about your business’s employment requirements or need any assistance with these issues, contact our office today at 804-525-0717 for a free consultation. We are happy to help and we look forward to hearing from you soon!
– By Roger L. Cleary, Partner
The Business Law Group, P.C.