What's the Difference Between an Employee and an Independent Contractor?

Whether you're classified as an employee or an independent contractor has a big impact on how your taxes are handled. Employees have taxes withheld from each paycheck and share the cost of Social Security and Medicare with their employer, with each side paying 7.65%. Independent contractors receive their full pay with no withholding and are responsible for paying both the employer and employee portions of Social Security and Medicare, which adds up to a 15.3% self-employment tax on top of income tax. The IRS looks at factors like behavioral control, financial control, and the nature of the relationship to determine proper classification — the worker's or company's preference doesn't decide it. Misclassifying workers can lead to significant tax liabilities and penalties for the business. If you work as a contractor, you'll receive a 1099 instead of a W-2, and you'll need to make quarterly estimated tax payments throughout the year.