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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22828
Experience:  Taxes, Immigration, Labor Relations
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When paying employees with cash and the employer is ...

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When paying employees with cash and the employer is responsible for the taxes at the end of the year, what percentage should be retained by the employer of the cash amount due to the employee?
Submitted: 7 years ago.
Category: Tax
Expert:  Lev replied 7 years ago.

Assuming you mean that you are paying to contractor - not employee - there will be self-employment taxes 15.3% of the net income (after deducting all related expenses) and additional income taxes based on the total income, filing status, dependents and other deduction available to the particular person.

If you are paying to the EMPLOYEE - you are required to withheld FICA taxes and pay employer's portion of FICA taxes and FUTA taxes. Income taxes should be withheld based on employee's filing W4 form.

Please let me know if any clarification needed.

Customer: replied 7 years ago.
Reply to LEV's Post: I'm paying under the table with cash. So lets say I have a person I am paying $9/hr for 40 hrs which equals $360. How much should I withhold for the amount in taxes that I will be liable for (Federal & State).
Expert:  Lev replied 7 years ago.

You are contradicted yourself - "paying under the table" doesn't have any tax attached...

If you are paying wages to the employee $360/week and the employee filled W4 form as single with two allowances - the paycheck stub would look as

Weekly Gross Pay - $360.00
Federal Withholding - $19.56
Social Security - $22.32
Medicare - $5.22
Arizona - $1.96
Net Pay - $310.94

Arizona income tax withholding is a percentage of the amount of federal income tax withheld. The employee completes Arizona Form A-4, Employee's Arizona Withholding Percentage Election, to elect an Arizona withholding percentage. I assumed 10%.

Customer: replied 7 years ago.
Reply to LEV's Post: Let me rephrase my question. Lets say I have a friend who I agree to pay an hourly wage of $10 for his services. I also inform my friend that if he works 50 hours for a total of $500 I will be deducting a percentage from it to pay for the federal and state taxes that I am liable for at the end of the year since I must claim that $500 as my own personal revenue. What is a fair percentage for me to deduct being that the $500 will be claimed on my tax return as revenue?
Expert:  Lev replied 7 years ago.

If you are paying $500 for service - this is your expense - not revenue. If this service is for your business - you will deduct the total expense amount on your tax return, if this is a personal service - in general it is not deductible but may be deductible in some circumstances (for instance, child care expenses, medical expenses, etc).

Now, if you hire your friend as a contractor - he will be responsible for all taxes and you will not withheld any taxes.

If you hire your friend as an employee and pay $500 wages - the withholding would depend on how the employee filled W4 form. Assuming it was filed as single with two allowances and 10% Arizona withholding - the paycheck stub would look as

Weekly Gross Pay - $500.00
Federal Withholding - $40.56
Social Security - $31.00
Medicare - $7.25
Arizona - $4.06
Net Pay - $417.13

Besides above as an employer you will be liable for:

Social Security (employer' portion) - $31.00
Medicare (employer' portion) - $7.25
FUTA and SUTA taxes - 6.2% of taxable wages. The taxable wage base is the first $7000 - if this is the only payment - $31.00

Please let me know if any clarification needed.

Customer: replied 7 years ago.
The person I have mentioned is not a contractor or any of the above. The $500 being paid out is revenue from services my business has rendered and therfore I must claim it. Because the person I mentioned must be paid under the table and there cannot be a record I must claim this as my own personal revenue (such as sole proprietership). That is why we have an agreement that I will withhold a portion of this amount so that I may pay taxes on it at the end of the year. How much should I withhold?
Expert:  Lev replied 7 years ago.

Thank you for clarification. Thus, assuming that $500 your net self-employment income - you will be responsible for following taxes:

  • self-employment taxes 15.3% - $76.5
  • income tax (depending on your tax bracket - assuming 15%) - $75
  • Arizona taxes (also depending on your tax bracket - assuming 3.55% on taxable income between $25,001 and $50,000 ) - $17.75

Total - ~$170

Your net after-tax income will be ~$330.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22828
Experience: Taxes, Immigration, Labor Relations
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