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 in Texas are responsible for paying their own Social Security and Medicare taxes, as they are not considered employees. The hiring entity is not required to withhold income taxes from payments made to independent contractors. The 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 work performed and the worker's independence in carrying out their tasks. It is crucial for businesses to correctly classify workers to avoid penalties and liabilities for misclassification, including back taxes and fines. Texas adheres to federal guidelines, including IRS criteria, to determine worker status. Misclassification can also affect unemployment insurance tax obligations and workers' compensation coverage.
