An independent contractor (also known as a freelancer) is a person or entity who agrees to work for another person or entity as a nonemployee. Because of the independent contractor’s status as a nonemployee, the contractor must pay their own Social Security and Medicare (FICA) taxes. And the person or entity hiring the independent contractor has no obligation to withhold income taxes from the contractor’s fees. It is important for the person or entity who hires a worker to properly classify the worker as an employee or as an independent contractor based on the IRS’s right-to-control test.
In Texas, the classification of a worker as an independent contractor or an employee is significant for tax purposes and compliance with labor laws. Independent contractors, unlike employees, are responsible for paying their own Social Security and Medicare taxes, known as self-employment taxes. The hiring entity does not withhold income taxes from payments to independent contractors. Proper classification hinges on the IRS's right-to-control test, which examines factors such as the degree of control the hiring party has over the way work is performed. If a worker is incorrectly classified as an independent contractor, the hiring entity may face penalties, back taxes, and interest. Texas adheres to federal guidelines for classification, and the Texas Workforce Commission also provides criteria to determine worker status for state employment laws. It is crucial for hiring entities to assess the relationship with the worker carefully, considering factors like behavioral control, financial control, and the relationship's nature, to ensure proper classification under both federal and state regulations.
