How do I manually calculate payroll taxes for cash payments made to my construction employees?

This is actually a pretty common situation in construction. Since you paid employees (not independent contractors) in cash, you still have payroll tax obligations regardless of payment method. First, don't issue 1099s - that's for independent contractors, not employees. That could create bigger problems down the road. Your employees should receive W-2s, not 1099s. For the manual calculations: You'll need to calculate federal income tax withholding (based on each employee's W-4), Social Security (6.2%), and Medicare (1.45%) for both employee and employer portions. You're responsible for both parts of FICA since you didn't withhold from their cash payments. You'll also need to calculate federal unemployment tax (FUTA) and any state taxes. Then complete and file all your quarterly 941 forms (you'll need to file late ones) and your annual 940. The penalties for late filing and payment can add up quickly, so I'd recommend working with the IRS through their voluntary disclosure programs to minimize these.

Been in a similar situation about 2 years ago with my landscaping business. I tried figuring out all the calculations myself and ended up making a mess of it. I finally used https://taxr.ai to help sort through all my payment records and calculate the proper withholding amounts. They have a tool that helps with retroactive payroll calculations specifically. The software analyzed all my payment records and generated the proper tax forms I needed to file. Saved me from a ton of mistakes I was making trying to do it manually. The calculations for back taxes get complicated quick, especially with the penalties and interest.

Just wanted to follow up - I was skeptical about taxr.ai but gave it a shot with my food truck payroll situation (was paying some staff in cash). I uploaded my payment records and it actually worked really well. Not only did it calculate all the proper withholding amounts, but it also generated the late 941 forms I needed to file. The penalty calculator was eye-opening - showed me exactly what I was facing but also identified which penalties I could get waived. They even generated a letter template for requesting penalty abatement that I submitted to the IRS. Definitely worth checking out if you're trying to clean up payroll tax issues from cash payments.

After dealing with payroll tax problems for years, I've learned the hard way that getting through to the IRS is almost impossible these days. When I needed to set up a payment plan for my back taxes, I spent DAYS on hold. Finally used https://claimyr.com and their system got me through to an actual IRS agent in under 45 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c With something complicated like retroactive payroll taxes, you're going to need to speak with the IRS directly at some point. Having someone who can actually get you through the phone system makes a huge difference, especially when you're trying to arrange payment plans or penalty abatement.

I have to eat crow here. After my skeptical comment, I decided to try the Claimyr service when I needed to talk to the IRS about a payment plan for my trucking business. I was totally wrong - the service actually works. I've wasted entire days on hold with the IRS before, but got connected to an agent in about 35 minutes with their system. For the OP with the construction crew payroll issue, being able to actually speak with someone at the IRS will be crucial. They have voluntary disclosure programs that can help reduce penalties, but you need to talk to an actual human to navigate those options. Having a way to reliably reach an agent makes a huge difference.

For manual payroll tax calculations on past cash payments, here's what I'd recommend: 1. Create a spreadsheet with each payment date and amount for each employee 2. Calculate FICA taxes (15.3% total - both employer and employee portions) 3. Estimate income tax withholding based on each person's likely tax bracket 4. Complete Form 941 for each past quarter (you'll file these late) 5. Prepare W-2s for each employee for 2024 6. Complete Form 940 for FUTA tax Remember that all these forms will be late, so you'll face penalties. Filing through the Voluntary Classification Settlement Program might help reduce those penalties though.

Don't you all think he should just amend the previous year's return and issue 1099s? Seems way simpler than going through all the payroll tax stuff. I did that with my lawn care business when I had a similar situation and it worked out fine.

I'd recommend checking if your state has a Voluntary Disclosure Agreement program for employment taxes. I went through this in Arizona after a similar situation, and while I still had to pay all the taxes, they waived most of the penalties. Saved me thousands. Most important thing is to get ahead of this before you get caught - showing initiative to correct the problem goes a long way.

I've been through something very similar with my roofing company last year. The key thing to understand is that paying employees in cash doesn't change your payroll tax obligations - you're still responsible for withholding and remitting all the same taxes as if you'd paid by check. Here's what I learned from my CPA: You absolutely need to treat these as employees (not contractors) and calculate the full payroll taxes. This means Social Security, Medicare, federal income tax withholding, FUTA, and any state taxes. Since you didn't withhold from their cash payments, you're now responsible for both the employee and employer portions. The manual calculation process is tedious but doable if you have good records. You'll need to work backwards through each quarter of 2024 and file amended 941s. The penalties will add up, but there are abatement options available, especially if this is your first time being late with payroll taxes. One thing that really helped me was getting on a payment plan with the IRS early in the process. Don't wait until you have everything perfectly calculated - reach out to them as soon as you can to show good faith. The sooner you start the correction process, the better it looks from their perspective.