Sorting out withholding: How to serve your workers best -- financially and legally

It's not as easy as checking with the IRS or an accountant to determine how much in taxes to withdraw from your employees' paychecks. Sometimes a closer examination is necessary.

By Katherine Vogt, AMNews staff. May 22/29, 2006.

When it comes to tax withholding for you and your practice's employees, seemingly innocuous oversights can come back to get you.

The frequent shape-shifting of Internal Revenue Service rules and the steady stream of changes in people's lives and finances means oversights can arise easily. But they can result in more than a slap on the hand, initiating steep penalties and interest until the miscalculations are fixed.

Experts say poor communication might be the No. 1 culprit behind many of these mistakes. Late payments, bad information and shoddy help also can cause problems. To avoid the mess, they say, physicians -- new and veteran alike -- can benefit from understanding the common pitfalls in withholding.

Employer physicians are responsible for making sure that proper taxes are withheld from employee paychecks. The correct withholding amount is based largely on the employee's income and claimed exemptions. The bulk of withholding is for federal and state income tax and payroll taxes that cover Social Security, FICA and Medicare. The figures typically can be found using IRS and state tax tables.

It seems straightforward, but errors can occur in several ways.

First, there can be ambiguity about whether certain workers qualify as "employees." Perhaps a nurse practitioner works in certain scenarios but not all the time. Is that person an employee or independent contractor? The answer will determine whether taxes should be withheld.

"The key word is control. If the doctor controls the work product, controls the worker as to when they work, how they work and how the work is to be done, then most likely that person is an employee," said Keith Hall, a certified public accountant and national tax adviser for the National Assn. for the Self-Employed in Dallas.