How are taxes handled differently for W2 employees compared to independent contractors?

W2 employees have taxes withheld from each paycheck by their employer, who is responsible for sending these withholdings to the government. This includes federal income tax, Social Security, and Medicare taxes. The employer also contributes to the employer's share of Social Security and Medicare taxes. This system means that employees have a portion of their taxes taken out automatically, simplifying the tax payment process and creating less burden on the employee for managing their own tax obligations.

In contrast, independent contractors operate as self-employed individuals and do not have taxes withheld from their payments. Instead, contractors are responsible for managing their own tax liabilities. They must estimate their taxes and make payments directly to the IRS, typically on a quarterly basis. This distinction means that while independent contractors might have the potential for more deductions and flexibility in managing their income, they do not have the benefit of automatic withholdings, which can often lead to larger tax payments due at once if not managed correctly.

This structure fundamentally differentiates the tax treatment between W2 employees and independent contractors, making it crucial for both parties to understand their tax obligations and the implications of their employment status.