USA Pay for Performance Confusion

[DanielSG]

Hello,

I am no expert regarding what I am about to ask, so please be gentle And maybe this thread belongs in the tax section, but I am not sure... :-(

I wanted to hire an independent contractor, but given the 2015 DOL and IRS rule changes, the person will have to be an employee. I am fine with that. Here are the details:

1. The new employee will be paid for each report written.
2. I do not want to pay the new employee a salary, because if they are not productive, and given the size of my business (very small), it could bankrupt me.
3. Furthermore, I would prefer the employee be "incentivized" to be more productive. If they are happy with their current earnings, then I am happy for them. If they want to earn more, then they can earn more. In this line of work, I think it is better for the employee to have control over their own destiny, but that is just me.

Here is my problem:
I am trying to figure out a formula to hypothetically calculate this new employee's pay, and I am struggling with addressing employment taxes. Here is an example:

• Employee writes 2 reports in a pay period, which generates $1,000 in revenue.
• I need to subtract fixed overhead expenses (e.g., additional office space for them, etc.)
• I need to subtract variable overhead expenses, like planned office expenses, and profit margin for the business, etc.
• Let's say after these subtractions, $700 is left from revenue earned.
• I know that I need to withhold 6.25% from the employee's earnings for social security, and I also need to set aside a 6.25% match for the employee, since I am an employer (I know there are other taxes, but I am trying to keep it simple).

How would I do this? If I just take 6.25% from the $700 ($43.75) for the employer portion, that brings their revenue generated to $656.25, and when applying 6.25% to this new number, I am theoretically withholding more (they pay $41.02, I put aside $43.75) than I should. I believe it makes sense to withhold the employer portion from the revenue they generate, because it is my cost of doing business (how else would I be able to pay it?)

I am hoping that I am over analyzing this, and somebody can provide me some useful tips and/or rules of thumbs to help me with this, because it is giving me a headache :-(

Thank you in advance!