For many years excise tax was the major source of revenue for the government operations. Initially, income taxes were enacted to finance the United States Civil War. Once the war ended, the taxes were repealed. In later years, an income tax was enacted; however, due to the exemptions and standard deduction amounts allowed to each taxpayer, a large portion of the population was not subject to this tax. Those individuals that did need to pay tax paid when they filed their tax returns.
In 1943, the Current Tax Payment Act of 1943 enacted the "pay as you go system." Under this act, the employer is required by law to withhold federal income taxes from wages.
Three factors must exist before an individual is subject to federal income tax withholding:
1. There must be, or have been an employer-employee relationship.
2. The payments received must be defined as wages under the law.
3. The employment must not be exempted by the law.
This chapter will discuss in detail the income tax withholding laws.
Who Are Employees?
The definition of an employee was covered in Chapters Two and Three in complying with the Social Security Tax Law. These same rules are applicable to the guidelines for federal income tax withholding. To summarize, remember a worker who performs services for you is your employee if you can control what will be done and how it is done. It is extremely important to understand the relationship that exists between the employer and employee so that the correct treatment of the payment is made.
Let's just review these relationships:
• Independent Contractors - Individuals such as lawyers, contractors, subcontractors, and accountants are generally not employees. The general rule regarding independent contractors is the individual is an independent contractor if the person for whom the services are being performed has to right to control or direct only the result of the work not the method or