To ensure your business is compliant with the law, it’s important to understand the differences between employee and independent contractor tax obligations in construction. While many of the same taxes apply to both employees and independent contractors, there are some key distinctions that can have an impact on your bottom line. Here’s a closer look at what you need to know.
Employee vs Independent Contractor Obligations
When it comes to taxes, employees and independent contractors are treated differently. Employees are subject to federal income tax withholding as well as Social Security and Medicare taxes. As an employer, you are responsible for paying half of the FICA taxes while your employees pay the other half through payroll deductions. Additionally, you must withhold state income taxes from employee wages as well as any applicable local or city taxes. Depending on where you do business, you may also be responsible for other employment-related obligations such as unemployment insurance contributions or disability insurance payments.
Independent contractors, on the other hand, are self-employed so they are generally not subject to withholding from their earnings. However, they must pay their own FICA taxes (both employer and employee portions) plus any applicable state income tax withholding requirements. They may also be responsible for filing estimated quarterly tax payments if their earnings exceed certain thresholds set by each state government.
Because employees are considered part of a company’s staff, employers are obligated to withhold income taxes from their wages and pay out Social Security and Medicare contributions on their behalf (FICA). They also must provide workers’ compensation insurance if required by state law. With independent contractors, employers are only responsible for providing 1099 forms at tax time so they can report their earnings correctly. Employers don’t need to pay into FICA or provide workers’ compensation coverage for them because they’re not considered “employees” under the law.
Making Sure You’re Compliant
The IRS takes misclassifying employees very seriously; employers who do so can face hefty fines and penalties for non-compliance with federal employment laws. To make sure you’re compliant, it’s important to understand the difference between employees and independent contractors—not just when it comes to taxes but also when it comes to employment rights such as minimum wage laws and overtime pay requirements.
Tax obligations for employers when hiring employees versus independent contractors vary significantly depending on whether they are classified as staff members or freelancers/contractors performing services on behalf of your organization. Knowing which classification applies is essential so you can ensure compliance with federal employment laws while avoiding costly fines or penalties due to misclassification errors. A qualified accountant at MKS&H can help you handle your business’s finances and ensure that you’re up to date with all applicable regulations.
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.