Difference between an Employee and an Independent Contractor

What is the difference between classifying and paying someone as an employee vs an independent contractor?

And why would an employer prefer one way or the other?

When a worker is categorized as an employee, the employer has financial and compliance responsibilities in connection with the employee.

The employer is obligated to pay ? of the FICA taxes on the wages of the employee, as well as other applicable State and Local charges associated with having an employee like Unemployment insurance.

Additionally, from a compliance perspective, the employer is responsible for withholding and submitting federal, state, and local taxes withholding on behalf of the employee to the appropriate governmental taxing agencies.

The FICA taxes the employer is responsible for can be costly, for example, for a salary of $100,000, the employer would need to pay 7.65% in FICA taxes which equates to $7,650.

If the same worker is categorized as an independent contractor, the independent contractor would be required to pay the complete FICA taxes, and for sending estimated tax payments to governmental taxing agencies.

Employers sometimes erroneously categorize employees as independent contractors due to not being familiar with the laws or possibly due to the financial and compliance burden associated with employees mentioned above.

Have a question about this or another tax-related matter? Feel free to reach out!

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