Employee vs. Independent Contractor

Employers must withhold federal income tax, social security tax, Medicare tax, state income tax, and local income tax from employees' paychecks. In addition, the company must match the social security tax and Medicare tax payments of employees and make federal and state unemployment insurance contributions on their behalf. However, withholding is not required for independent contractors who provide the company with a Taxpayer Identification Number (TIN). Nor must the company pay social security tax or Medicare tax on the services provided by an independent contractor.

Designating a worker's status as employee or independent contractor is the responsibility of the employer, not the employee. The primary way that an individual qualifies as an employee or independent contractor is the common law test. However, exceptions do allow a worker qualifying as an employee under the common law test to be classified as an independent contractor.