Employee Vs. Contractor Tax

Employees and independent contractors are both responsible for paying the same income taxes, but they treated differently by the IRS when it comes to paying payroll taxes. Payroll taxes are also known as FICA taxes, or Federal Insurance Contributions Act taxes.

Types

There are two types of payroll taxes: the Social Security tax, which goes towards social security benefits, and the Medicare tax, which goes toward paying the costs of the Medicare program.

Size

The Social Security tax is 12.4 percent and is only applicable to a certain limit of your income. For 2009, the tax only applied to the first $106,800 of payroll income. The Medicare tax is only 2.9 percent but applies to all of your payroll income.

Effects

Employees split their payroll taxes with their employer so the employee pays 6.2 percent towards Social Security taxes and 1.45 percent toward Medicare taxes and the employer matches those payments. Independent contractors must pay the entire amount on their own.

Calculation

Payroll taxes are charged on 100 percent of the earnings of employees but only 92.35 percent of the net income of contractors. The money is automatically deducted from the employee's paycheck. Contractors must file a Schedule SE along with their taxes to show how much they owe.

Tax Breaks

Contractors are allowed to deduct half of their payroll taxes from their taxable income on their income tax to compensate for having to pay the entire FICA tax on their own.

References

• Social Security Online: FAQs
• IRS: Self-Employment Tax
• IRS: Schedule SE