Section 530(e)(3) of the 1978 Internal Revenue Code allows for employers to not be responsible for paying an employees taxes if certain requirements are met by the business and there is a relationship between the business and an employee.
Wage Earners have taxes deducted from their pay as shown on their paycheck stubs or pay statements. Employers are required by law to deduct monies for Social Security, Federal Income Tax, and Medicare payments. Employers are then obligated by law to send in those monies to the Internal Revenue Service. If for some reason an Employer does not send in a Wage Earner’s taxes, the Employer only will be held liable as long as the taxes were deducted from the employees pay. Employees will receive a W-2 form at the end of the year documenting the amount that was withheld for tax purposes.
Independent contractors do not have taxes taken out of their paycheck or monies received. Independent contractors must pay taxes on their own initiative through estimated payments (ETPs). Estimated payments are due quarterly but can be required on a more frequent basis.
Smaller business like independent contractors often do not make estimated payments. As a result, they often owe taxes at the end of every year. Independent contractors often work for various different companies and people, but can also work for only one company. Generally, independent contractors are paid on a per job, work performed basis. If an independent contractor receives a tax statement from an employer, it will be on a Form 1099.