Tax Implications of Seasonal Workers
Connor Smart, Tax Senior
For those of us who have made New England our home, discussing the weather and the seasons is not merely small talk, but rather an issue of daily and near-existential importance. Beyond the fluctuating temperature, many businesses and workers in New England also see their profits and employment opportunities go up and down with the change of seasons. What both employers taking on temporary employees and individuals looking for seasonal employment may overlook, though, are the many tax planning implications and issues that seasonal businesses can create. This article will address a number of these matters from both the employer’s and employee’s perspectives.
Taxpayers should be aware of and plan for how revenue levels change seasonally, as the IRS generally requires taxpayers to submit estimated tax payments evenly over the course of the year. This can make planning and calculating the correct amount to pay in estimated taxes difficult, especially for cyclical businesses. For example, taxpayers may have a very slow year with almost no profits and suddenly find themselves in an exceptionally busy and profitable three-month window. This kind of business cycle can result in very large and unexpected tax bills if the taxpayer did not plan for or make estimated payments in a timely manner.
Taxpayers who experience such seasonal profit swings may want to “annualize” their incomes when preparing their tax returns. This allows taxpayers to vary the amounts of federal estimated tax payments based on when profits are earned, instead of evenly over the year. State income taxes may also be due, and some, but not all, states allow use of the annualization method.
Trying to appropriately staff with seasonal employees can also raise tax concerns. If temporary employees work remotely in multiple states, or if they are regularly moving to work in new areas on behalf of their employer, then both the employer and the employees may be facing multiple state income tax filing requirements. Employers who hire seasonal help will also need to determine their withholding requirements for any nonresident and foreign workers.
Seasonal employees frequently include college students, which may hail from a different state or even a different country, and employers should be aware of extensive and expensive tax compliance requirements that may be triggered by hiring out-of-state and especially non-US citizen employees. For example, employers who hire foreign workers will need to determine and track their employees’ residential status, complete specific payroll and informational forms for the IRS, evaluate tax treaties between the employees’ native country and the United States, and address many other considerations.
While there are many instances where seasonal employees can create multi-layered filing obligations, there are also occasions when employers may be entirely exempt from withholding income taxes on their employees’ behalves. Certain states exempt taxpayers from income tax withholding if the taxpayers will not owe any tax to the state in question at year-end. There are also nonresident withholding exemptions for military families. Such tax-exclusionary programs may significantly simplify an employer’s compliance and bookkeeping costs, even if the employer hires a myriad of multi-state, temporary employees.
There are many other issues that seasonal employees – especially college students – should be aware of if seeking temporary employment. Taxpayers working multiple seasonal jobs may find themselves with unexpectedly large tax bills if they are not careful. For example, if a student is engaged to work with a particular employer part-time over the summer, the employer might not withhold taxes on the employee’s behalf. This does not mean that the student-employee does not have any tax liabilities by the end of the year. Students who have one or more seasonal jobs – such as one at school and one during summer and winter breaks – may have bigger tax liabilities on a combined basis than either they or their employers realize when considering only one job. With no withholding payments made, these student would owe all of their taxes at once when they file their returns, and may also be subject to interest and penalties.
Seasonal employees should also be aware of their state filing requirements - especially New Englanders who have so many states geographically close to each other. It would not be uncommon, for example, for one student to work while attending school in New Hampshire, work at another place on weekends in Vermont, and work summers in Maine. Each state has its own filing requirements and exemptions, and students seeking seasonal employment should track which jurisdictions they work in, how much income is earned from each source, and determine whether or not tax will be due, state by state.
College students who are looking for work during their breaks or while at school should also be aware of their dependency statuses. Students who are claimed as dependents on their parents’ tax returns will have significantly reduced standard deductions available to them. There could also be “Kiddie Tax” implications to consider as well, where the student-dependent is taxed for federal purposes at an entirely different (and higher than usual) rate.
However, not all is bad news, as different states and municipalities offer various credits and deductions that are helpful to seasonal or student employees. Maine, for example, offers an expansive tax-credit for people who are living and working in Maine while also paying off student loans. These kinds of seasonal jobs might be the perfect way for a college student to “jump-start” their future and start getting rid of their student loans early. Also, many businesses that hire seasonal help intend for their employees’ wages to be supplemented by tips. The Tips Credit – the subject of a previous BNN article – allows employers to reduce their wage expense and generate an income tax credit at the same time. For seasonal businesses, especially New England restaurants and taverns, this credit could provide significant tax savings.
Failure to plan for or to be aware of the tax consequences of employing seasonal workers, or of taking on a seasonal job, can result in a loss of productive work time, unanticipated taxes, filing penalties and fees, and lost economic opportunities. Alternatively, efforts to self-educate regarding the tax implications of seasonal business cycles, or to seek out professional advice from qualified tax advisors, can help not only protect against unexpected taxes and other costs, but also open up new business opportunities and create a more successful season.
For more information, please contact your BNN tax advisor at 800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.