At the outset, it's important to understand the difference between an employee and independent contractor. The difference is determined by the amount of control an employer exercises. While both employees and independent contractors perform services at the behest of the employer, only with employees can the employer dictate how the service be performed. Independent contractors perform services in a manner they see fit. Independent Contractors generally charge higher fees for specialized services, use their own materials, and regulate their own work plan.
You should be aware of tax treatment differences between employees and independent contractors:
- You must withhold state and federal income tax
- You must withhold Social Security tax
- You must withhold Medicare tax
- You must pay Unemployment tax on wages
- You must complete a W-2 form for each employee
For independent contractors:
- Employers do not have to worry about the above tax issues for employees. Independent Contractors handle taxes related to social security, medicare etc.
- Employers have to produce a W-9 to be completed by the independent contractor.
- You may have to file information returns (form 1099-MISC) to report certain types of payments made to independent contractors. Generally, any payment in excess of $600 will require a 1099-MISC form.
If you misclassify employees as independent contractors on your tax return, you'll be liable for paying employment taxes for that worker, so double check all Employment Agreements and Independent Contractor Agreements to be sure of your working relationship.
For more information about business taxes, go to www.irs.gov.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.