![]() Thus, the employee’s wages are not offset by any work-related tax deductions.Ĭompare this to independent contractors. This change was made to our tax code as part of the Tax Cuts & Jobs Act of 2017. The employee is generally not able to deduct any expenses they incur for their work. This means that the wages are subject to higher ordinary income tax rates. Both taxes are withheld by the employer and remitted to the IRS.Įmployee wages are taxed as ordinary income (as are payments made to contractors). They also pay employment taxes on their wages. The answer to this question is, “it depends.” Let’s consider the taxes paid by employees and the taxes paid by independent contractors.Īn employee pays income tax on their wages. Who Pays More Taxes, Independent Contractor or Employee? The contractor may be viewed as a temporary worker, and not offered any advancement opportunities. Independent contractors are often on their own when it comes to training and advancement. The independent contractor may be expected to have other clients or customers they are to perform services for concurrently. The independent contractor is on their own when it comes to health insurance and other benefits. The employee has no real opportunity for profit.Ī worker who is an independent contractor has none of the benefits noted above, but also does not have the strings that come with them either. This means that they cannot compete with the employer while employed, they have to dedicate their time and talents to the employer, and the employer does not have to share the profits of the employee’s efforts with the employee. The employee has a duty of loyalty to their employer. These benefits can come with some strings. Employers often offer training and advancement opportunities to employees based on this stability and the perceived permanency of the relationship. In addition, the employer may view the employee as more stable and reliable. These protections are enforced by the Department of Labor (“DOL”) and the corresponding state agencies.Īt a minimum, these protections include the right to a minimum wage, hour laws, unemployment insurance coverage, and possibly certain benefits–such as health insurance, access to pension plans, paid leave and holidays, and other fringe benefits. Others are standard, such as the protections found in the Fair Labor Standards Act (“FLSA”). Some of these protections vary from state to state and based on the size of the business and its industry. The easiest way to explain the difference between an independent contractor and an employee is to describe both, so you can compare and evaluate the differences.Ī worker who is an employee will usually be entitled to various legal protections. What is an Independent Contractor? What is an Employee? The answers to the questions below should help you evaluate these pros and cons. This analysis involves more than just tax considerations. This is true when viewed from the vantage point of the worker as the taxpayer and from the vantage point of the employer as the taxpayer. There is no one correct answer to this question.Īs explained below, there are numerous advantages and disadvantages for both the employer and the worker. Is it better to be an Employee or an Independent Contractor for Tax Purposes? This article helps explain why workers are misclassified, why your workers may actually be contractors, and how to fend off an IRS payroll tax attack. ![]() If they catch you and you misclassify your workers, you may find yourself with a sizeable tax debt that your business cannot afford to repay. The IRS has a whole audit team that is looking for taxpayers who make this mistake. ![]() This is why misclassifying employees as independent contractors can be a very costly mistake. Once a business gets behind on payroll taxes, it can be very difficult to get caught up. Payroll taxes are one of the largest expenses for small and medium-sized businesses.
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