Payroll taxes are taxes withheld or paid by an employer, for or on behalf of employees.  Payroll taxes include federal income tax withholding, state income tax withholding, social security and Medicare taxes, and federal and state unemployment taxes.  Taxes paid are based on compensation, which includes all items paid to or on behalf of an employee such as wages and commissions (except for certain excludable amounts such as qualified reimbursed business expenses or nontaxable moving expenses).

Employee or Independent Contractor

Before you can determine how payment for your services will be treated in terms of payroll taxation, you must determine if you are an independent contractor or an employee for purposes of the work in question.

Independent contractors are people such as lawyers, accountants, architects, contractors, or subcontractors who follow an independent trade or profession in which they offer their services to the public.  However, whether such people are actually employees or independent contractors depends on the facts of each particular case.  Traditionally, anyone who performs services is an employee if the company or person paying for those services (the "payor") can control the details of how the services are to be performed.  Facts indicative of the employment relationship include:

• Instructions as to when, where, and how to perform the work;
• Payor-provided training;
• Reimbursement of business expenses;
• Payment by the hour, week, or month; and
• Payment of employee-type benefits such as insurance, vacation, and retirement benefits.

Facts indicative of an independent contractor relationship include:

• Emphasis on results;
• Independent training;
• Unreimbursed business expenses;
• Investment by the worker in work facilities;
• Payment by the job rather than by time period; and
• Extent to which the worker can realize a profit or loss on the transaction.