How does FICA treat independent contractors compared to employees?

FICA, or the Federal Insurance Contributions Act, establishes guidelines for payroll taxes to be collected from employees to fund Social Security and Medicare. The correct understanding of how FICA treats independent contractors relative to employees is that employers do not pay payroll taxes for independent contractors.

When a business hires an employee, it is responsible for withholding certain taxes from the employee's wages, such as Social Security and Medicare taxes. Additionally, the employer must match the employee's contribution to these taxes, effectively doubling the contribution amounts made towards the Social Security system and Medicare.

In contrast, independent contractors are treated differently. They are considered self-employed individuals, and as such, they are responsible for paying both the employer and employee portions of these taxes through self-employment tax. This distinction means that while employees have their taxes withheld from their paychecks, independent contractors handle their tax obligations on their own without any withholding by the hiring entity. Thus, employers have fewer obligations regarding tax contributions for contractors than they do for employees.

This distinction is significant because it impacts the overall tax liability and administrative responsibilities associated with hiring independent workers versus traditional employees.