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If you are an employee, your employer is required to take taxes out of your wages and pay them to the government. As an independent contractor, you are responsible for paying your own taxes. If your job does not withhold taxes from your income, it might stem from one of many reasons.
A hiring party that treats you as an independent contractor instead of an employee does not withhold taxes from your income. At tax time, it should give you a Form 1099-MISC that shows your annual earnings. In this case, you must pay your own taxes due to the government. If your employer pays you in cash and does not withhold taxes, it probably considers you an independent contractor or is using cash as a way to escape paying its share of employment taxes. It‘s possible your job does not withhold taxes because income tax withholding rules state no taxes should come out of your wages.
You are likely an employee if your employer has the right to control what type of work you do and how you do the work. If you control your own work hours and how you perform the job, then you are likely an independent contractor. To verify your classification, you may consult the Internal Revenue Service website.
Income Tax Withholding Rules
Your federal, and sometimes state, income tax withholding amount depends on your earnings and the allowances you claim on your federal and state tax withholding form. If your wages are not high enough or if you claim several allowances, the result might be zero withholding. If you claimed “Exempt” on your federal or state tax withholding form, no income taxes should come out of your pay. Lastly, if you work in a state that does not impose an income tax, you are not subject to state income tax withholding.
Social Security and Medicare Taxes
Even if income taxes rightfully are not withheld from your wages, Social Security and Medicare taxes should come out, unless you qualify for one of the few exceptions. For example, students who work for a college or university they attend generally are exempt from Social Security and Medicare taxes. These two taxes are based on flat percentages of your wages. Therefore, if you are an employee, no matter how little you earn, you should pay something.
Solutions to Improper Withholding
If your employer erroneously classifies you as an independent contractor, ask him to fix the issue. The same applies if he regards you as an employee but fails to withhold taxes properly from your pay. If he refuses to correct the problem, call the IRS at 800-829-1040 and report him. The IRS will investigate the matter. If the agency cannot obtain the taxes from your employer, you are responsible for paying your share of taxes due. Contact the state revenue agency to report your employer if he fails to properly withhold state taxes from your wages.
Independent Contractor Responsibilities
As an independent contractor, you may have to make quarterly estimated tax payments and file an annual federal return with the IRS. If you fail to make estimated payments as required, you will have a larger tax bill when you file your yearly return. If you work as an independent contractor and as an employee, you may fill out your employment withholding tax form so sufficient taxes are withheld to cover both liabilities.
- U.S. Small Business Administration: How To Calculate and Make Estimated Tax Payments
- IRS.gov: 2013 Form W-4
- IRS.gov: Publication 15
- IRS.gov: Employer and Employee Responsibilities - Employment Tax Enforcement
- IRS.gov: IRS Warns Businesses, Individuals to Watch for Questionable Employment Tax Practices
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.