What is a key difference between an employee and an independent contractor for tax purposes?

The distinction in tax treatment between an employee and an independent contractor primarily revolves around how taxes are managed. An employee typically has taxes withheld by their employer, such as income tax, Social Security, and Medicare contributions. The employer is responsible for these withholdings and submits them to the government on behalf of the employee.

In contrast, independent contractors generally receive their payment in full without any taxes deducted at the source. These contractors are responsible for handling their own tax obligations, which includes making periodic estimated tax payments throughout the year. This fundamental difference in how taxes are managed is crucial for understanding the broader implications of employment classifications for both tax responsibilities and financial planning.

While factors such as supervision, eligibility for benefits, and the duration of the contract can provide context for determining the nature of the employment relationship, they do not directly address the key tax implications that differentiate employees from independent contractors. The methodology of tax withholding is indeed the central aspect defining the distinction in tax treatment between the two classifications.