Bottom Line
Tax Tips
Paying an employee, Social Security questions

By Howard Abrams, PBS TAX & BOOKEEPING

So many times we are asked how to pay someone who works for an owner-operator. Usually, the preferred mode is to just cut the person a check without payroll deductions.

If you pay someone $100, it is costing you $110 because payroll taxes amount to approximately 10 percent of gross pay. Then you need to get workers' compensation insurance. That could range from 5 to 6 percent up to 15 or 20 percent. That would be on top of the $110. Then you need to have someone prepare the payroll tax reports.

So the bottom line is many employers in the trucking industry avoid payroll. In those cases they usually do not buy workers' compensation insurance either. We do not recommend doing that unless the employees are truly independent.

Q. What are the implications of not putting my employee on payroll?

A. If you terminate employees, they can file for unemployment insurance. However, the fact that you do not have a payroll account will be discovered then and you will be hit with back payroll taxes, penalties and interest.

Q. So is that all if I pay back the taxes and penalties?

A. No. We have just been made aware of a situation where an employer paid the employee by straight check and issued a 1099. The situation was discovered when the former employee went to collect unemployment.

The employer had to pay the back payroll taxes and penalties, and the state also notified the work comp department. Because the employer did not pay the work comp insurance either, a penalty was assessed for avoiding the work comp insurance of $100,000. That fine was levied by a particular state.

Q. Are you telling me to pay work comp insurance?

A. Yes, to comply with the rules and stay out of trouble, pay work comp for an employee who is not an independent contractor.

Q. If I'm collecting Social Security benefits, do I still have to pay Social Security and Medicare tax on my earnings if I continue to work?

A. Yes. Whenever you work, whether as an employee or an owner-operator, you must pay your Social Security and Medicare taxes. This is true, regardless of your age.

Q. I am at full retirement age and still working. Do I have to report my earnings to Social Security?

A. No. When you reach full retirement age, you no longer need to report your earnings to Social Security because there is no limit as to what you can earn. You do, however, need to report earnings for those months in the calendar year before the month you reach full retirement age. For example, if you reach it in June, you would need to report your earnings for the five previous months.

Q. How much can I earn and still get benefits if I have not reached full retirement age?

A. If you are younger than full retirement age, there is a limit to how much you can earn and still receive Social Security benefits without penalty. For 2010, you must deduct $1 from your benefits for every $2 you earned above $14,160.

If you reach full retirement age during 2010, you must deduct $1 from your benefits for each
$3 you earn above $37,680 until the month you reach full retirement age. LL

Everyone's financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax professional.

This article is written by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for more than a quarter-century. If you would like further information, please contact PBS at 800-697-5153 or visit their website at