Independent Contractor vs. Employee: The Tax Consequences

September 23, 2012

Independent Contractor vs. Employee: The Tax Consequences

For workers, being classified as an independent contractor rather than an employee can have significant tax consequences as well as other financial repercussions. When a worker is classified as an employee, his or her employer is responsible for withholding a portion of the worker's income for income taxes, as well as other taxes such as Social Security, Medicare and unemployment. At the end of the year, employers are required to provide employees with W-2 forms showing the amounts withheld throughout the year.

In contrast, workers who are classified as independent contractors do not have taxes withheld from their paychecks. Instead, independent contractors are responsible for keeping track of their own tax liability and making the payments on their own. This requires careful planning and saving, and may be more challenging to workers who are accustomed to having their taxes deducted automatically. Estimating tax liability can be particularly difficult for independent contractors who are just starting out or whose workflow is unpredictable.

At the end of the year, instead of a W-2 form, an independent contractor will receive a 1099 form from each of the companies that he or she contracted with during the year. A 1099 form shows all of the wages that the company paid to the independent contractor during the year, and is used like a W-2 to help establish the worker's tax liability for that year.

In addition to being responsible for their own taxes, independent contractors are often deprived of many of the benefits and protections that are available to full-fledged employees. For instance, independent contractors typically do not receive benefits like health insurance, retirement plans, sick days or paid vacation time. In addition, they may not have access to unemployment, workers' compensation or disability benefits if they lose their jobs or become unable to work due to an injury or illness.

Although there are several potential drawbacks involved in working as an independent contractor, there are also a number of potential benefits. For instance, independent contractors typically have far more control over their day-to-day schedules than employees, and they are often able to deduct their business expenses from their income taxes. For more information about the legal and financial consequences of working as an independent contractor rather than an employee, contact a knowledgeable tax attorney.

Article provided by Law Office of Bruce A. Gage
Visit us at http://www.brucegagelaw.com/