What do we mean by the term worker classification?
Not all workers are considered employees. Whenever an employer/employee relationship exists, the employer has certain payroll obligations that do not exist when a worker is classified as an independent contractor.
When a worker is classified as an employee, the employer is responsible for withholding federal income tax, social security, and medicare, in addition to any state employee withholding and tax requirements that may exist. In addition, the employer must pay social security, medicare, and FUTA tax, in addition to any state employer taxes that may exist. Timely tax deposits must be made and all payroll activity is reported quarterly and/or annually using the appropriate forms.
Moneys paid to independent contractors are not subject to withholding or payroll taxes. Likewise, the company is not required to pay any form of payroll tax on moneys paid to an independent contractor.
Caution: Before classifying a worker as an independent contractor, ensure they meet all of the requirements laid out by the IRS.