Employee or Independent Contractor, What Are the Tax Implications?

Whether a worker is an employee or an independent contractor depends on the relationship between the worker and the business.

When a worker is classified as an employee, the employer must withhold income taxes as well as Social Security and Medicare taxes from the employee’s paycheck. The employee and the employer each contribute a percentage of the worker’s wages to pay Social Security and Medicare taxes (more commonly referred to as Federal Insurance Contributions Act (FICA) taxes). The employer must also pay unemployment taxes under the Federal Unemployment Tax Act (FUTA) on the employee’s wages. When a worker is classified as an independent contractor, the worker is responsible for paying income tax and the entire contribution for Social Security and Medicare taxes.

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