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 Colorado, the classification of a worker as an independent contractor or an employee is significant for tax purposes and compliance with labor laws. Independent contractors are responsible for paying their own Social Security and Medicare taxes, as they are not employees of the hiring entity. The hiring party is not required to withhold income taxes from payments made to independent contractors. Proper classification is guided by 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 the execution of their tasks. Misclassification can lead to legal and financial penalties. It is crucial for businesses in Colorado to accurately determine a worker's status to ensure adherence to state statutes and federal law regarding employment, taxation, and labor regulations.