Expert: Ed McFarland - 8/7/2004

Question
I'm starting a small business in NJ. Can you tell me what federal and state obligations I will have to pay if I hire an employee (ie: W-2, 1099, quarterly or yearly taxes, unemployment insurance, social security, medical insurance, retirement plans, etc.) versus what my obligations are if I hire a subcontractor?
Thanks for your time.
Eileen

Answer
If you hire an employee, that would be a W-2 employee, you would have to pay the employer's share of federal, social security and medicare taxes in addition to the state taxes which is where you would pay unemployment insurance and whatever NJ requires for worker's comp insurance.

Plus given what the business is, you may have to provide benefits such as healthcare and retirement plans to attract the type of talent you need to be successful.

A subcontractor or 1099 contractor, a worker assumes more of these payments since they are in business for themselves. However you lose a lot of control. For example you can't make them work a regular schedule or act like a regular employee or you will have to pay the taxes with penalties.

Go to www.irs.gov and to NJ site and find the pages about your obligatons for hiring employees.

Also to avoid the headaches of staying on top of the changes in tax and employment rules, find a local payroll service. That expense against making amistake is money well spent.

Good luck.