The Difference Between Employees & Independent Contractors
When hiring new workers/contractors, they must be classified correctly as either an employee or independent contractor. The correct classification matters because it determines how taxes are being handled. For example, contractors are liable for their own taxes but as employers, you are liable for your portion of FICA taxes for your employees. The IRS has identified three major categories (https://www.irs.gov/pub/irs-pdf/p1779.pdf) that determine if a worker is an employee or independent contractor.
In Publication 15-A, Employer's Supplemental Tax Guide, the IRS identified three categories of evidence that are relevant in determining whether a worker is an employee or an independent contractor:
Behavioral control: Whether the business has a right to direct and control how the worker does the task for which the worker is hired;
Financial control: Whether the business has a right to control the business aspects of the worker's job; and
Type of relationship of the parties: Facts that show the parties' type of relationship (e.g., the degree of permanency, whether employee-type benefits are provided).
In a nutshell, workers who are employees receive a Form W-2, Wage and Tax Statement, and employers must withhold taxes from employee paychecks and remit them to the IRS on the employee's behalf. ~ Employers must withhold Social Security and Medicare taxes taxes). ~ The FUTA tax rate is 6%, but it is offset in large part by credits for SUTA payments.
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