October 8, 2024

Hiring Seasonal Employees: What SMBs Need to Know About Payroll Taxes

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For many small businesses, the busy season means bringing in extra hands to keep operations running smoothly. Whether you run a retail store, restaurant, or service business, hiring seasonal employees can give you the boost you need to meet increased demand. But with those temporary hires come payroll tax obligations that can trip up even the most experienced business owners.

Before you onboard your seasonal staff, it’s essential to understand how payroll taxes work and what steps you need to take to stay compliant. Proper planning now can save you headaches and unexpected tax bills down the road.

1. Seasonal Workers Are Subject to Payroll Taxes

One common misconception is that seasonal or temporary workers are exempt from payroll taxes because they’re not full-time or permanent. However, that’s not the case. In the eyes of the IRS, seasonal employees are treated the same as regular employees when it comes to payroll taxes. This means you’ll be responsible for withholding and paying:

Federal income tax
Social Security and Medicare taxes (FICA)
State and local income taxes (where applicable)

You’ll also need to report their wages on a W-2 form at year’s end, just like your full-time staff.

2. Understand the Difference Between Employees and Independent Contractors

Another tax consideration is determining whether your seasonal workers are employees or independent contractors. Misclassifying an employee as a contractor can lead to significant tax penalties, so it’s important to get this right from the start.

Employees: You control how, when, and where they work. You’re responsible for withholding payroll taxes.
Independent Contractors: They control how they complete the work and typically provide their own tools or equipment. You’re not required to withhold taxes, but you do need to issue a 1099-NEC form if you pay them $600 or more during the year.

If you’re unsure whether a worker should be classified as an employee or contractor, it’s best to err on the side of caution and treat them as employees—or consult a labor attorney to review your situation.

3. Seasonal Employee Wages May Affect Your Unemployment Taxes

In many states, the wages you pay seasonal workers are subject to state unemployment taxes (SUTA). However, some states have exemptions or reduced rates for businesses that hire temporary employees, particularly for short periods during peak seasons.

Check with your state’s tax authority to see if there are special rules regarding unemployment taxes for seasonal workers. Failing to account for these taxes could result in penalties or an increase in your overall tax rate.

4. Affordable Care Act (ACA) Implications for Seasonal Employees

If your business has 50 or more full-time equivalent employees (FTEs), you’re subject to the employer mandate under the Affordable Care Act (ACA). This means you must offer health insurance to full-time employees or face potential penalties.

The ACA defines a full-time employee as someone working 30 hours or more per week. Seasonal workers are generally excluded from the employer mandate, but you’ll need to keep careful records to prove their seasonal status. If your seasonal hires end up working more hours than anticipated, you may need to adjust your benefits offering accordingly.

5. Stay Organized for Smooth Payroll Management

Hiring seasonal workers means an increase in your payroll load, which can complicate things if you’re not organized. To make sure payroll runs smoothly, consider the following:

Set up payroll accounts for new employees: Get your payroll software or service ready for your seasonal hires and make sure you're set up to handle withholdings.
Track hours accurately: Whether your seasonal workers are part-time or full-time, ensure you’re accurately tracking their hours to avoid any payroll discrepancies.
Keep records: Make sure you have all the necessary employee forms (like the W-4 and I-9) on file and ensure their information is accurate and up to date.

An organized payroll system will ensure you don’t miss any tax obligations, and it makes filing much easier at year’s end.

6. Consult an Expert for Compliance

Payroll taxes can be tricky, especially when it comes to temporary or seasonal employees. Mistakes in payroll tax filings can lead to penalties, and that’s a risk no business owner wants to take. Consulting with a tax and accounting expert ensures your business stays compliant with federal, state, and local regulations—without the stress.

We can guide you through the complexities of hiring seasonal employees, managing payroll taxes, and staying compliant with employment laws. By outsourcing this aspect of your business, you’ll have more time to focus on what you do best: running your business and serving your customers.

Be Prepared and Stay Compliant

Hiring seasonal employees can be a great way to handle the rush of busy periods, but it’s crucial to stay on top of your payroll tax obligations. From withholding the correct taxes to keeping accurate payroll records, being prepared will save you time, money, and stress.

Need Help Navigating Payroll Taxes for Seasonal Workers?
Talk to us today! As accounting and tax experts, we’ll ensure you stay compliant, avoid penalties, and keep your business running smoothly. Contact our office to discuss how we can support your payroll and tax needs, so you can focus on growing your business.

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Hiring Seasonal Employees: What SMBs Need to Know About Payroll Taxes