Q: Do I have to pay payroll taxes for Freelancers and 1099 Employees?
Payroll taxes work differently for 1099 workers (freelancers and independent contractors) than for W-2 employees.
Employers and W-2 employees normally share payroll taxes. However, it’s a different story for 1099 employees who work as freelancers and independent contractors.
What are payroll taxes?
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Payroll taxes are taxes withheld from an employee’s salary by an employer who pays it to the government on their behalf. The tax amount is based on wages, salaries, and tips paid to employees. These payroll taxes are deducted directly from the employee’s earnings and paid directly to the Internal Revenue Service (IRS) by the employer.
Because payroll taxes are taxes paid on the wages and salaries of employees, employers only pay payroll tax on their W-2 employees — not on their 1099 workers, freelancers, or independent contractors.
How much do I pay in payroll taxes for W2 employees?
If you look at your last pay stub, you will notice deductions for Social Security and Medicare. These two items (sometimes referred to as FICA, Federal Insurance Contributions Act, and MEDFICA, and Medicare Federal Insurance Contributions Act) equal 7.65 percent of your wages. Employers contribute a 6.2% tax to fund Social Security and a 1.45% tax to fund Medicare; W-2 employees also contribute a 6.2% tax to fund Social Security and a 1.45% tax to fund Medicare. Thus, employers pay a combined 7.65% payroll tax on their W-2 employees wages for FICA and MEDFICA.
Employers are also responsible for paying 6.0% on the first $7,000 earned each quarter for FUTA (Federal Unemployment Tax Act) to fund unemployment insurance and state unemployment agencies. Every state receives a tax credit of 5.4% of the unemployment tax to partially cover FUTA payments. As a result, employers typically only pay 0.6% of the first $7,000 of what each employee earned during the quarter.
In addition, employers are also responsible for paying state and local (city, county, etc.) payroll tax on behalf of employees. These taxes vary based on location.
Who pays for payroll taxes for 1099 workers?
As a client of a 1099 worker, you don’t pay your freelancer a salary. You pay fees based on the scope of work agreed to, according to terms agreed upon by both parties in your Master Service Agreement / consulting agreement / independent contractor agreement.
Since you don’t pay salaries to your freelancers, independent contractors, and other 1099 workers and vendors, you don’t pay their payroll taxes. How those taxes get paid depend on the tax and legal structure of your 1099 worker.
Generally, since 1099 workers (freelancers and independent contractors) don’t receive wages, they must pay their own payroll taxes. For those who are self-employed or sole proprietorships, they must pay the entire payroll tax on their own. This self-employment tax totals 15.3% — plus another 0.9% surtax for Medicare for those whose self-employment earnings exceed $200,000 — and independent contractors must pay for this on their own as part of their quarterly estimated taxes.
1099 workers who have incorporated an S Corp are still responsible for paying their own payroll taxes, but do so at a slightly higher rate on the portion paid to themselves as their employee wage. They are able to split their profits between their own employee wage and their distribution of profits, minimizing their payroll tax expenditures.
Similarly, 1099 workers who have incorporated a C Corp, will pay payroll taxes on the wages that the corporation has paid to them. If your vendor is a C Corp that employs the freelancers working with you, then that C Corp is responsible for payroll taxes for your freelancers.
What tax responsibilities do I have for my freelancers?
Instead of Form W-2, these workers rely on Form 1099-NEC as part of their tax reporting documentation. So while you aren’t responsible for paying payroll tax on 1099 workers, each January you must send 1099-NEC to your Independent contractors and freelancers if you have paid them $600 or more in the previous tax year.
How do payroll taxes differ from income taxes?
Payroll taxes are used to fund specific programs and are distinct from income taxes. Individuals are typically taxed at both the federal and state levels, and, in some cases, municipalities may also impose local taxes. While everyone pays a flat payroll tax, income taxes are progressive — meaning the rates vary based on earning amounts. Federal income taxes are put into the government’s funds at the U.S. Treasury, while state and municipality income tax, if applicable, goes into the state’s or municipality’s treasury.
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Updated: December 10, 2020
Quick note: This is not to be taken as tax advice or legal advice or payroll advice. Since tax rules and laws change over time and can vary by location and industry, consult a CPA / tax advisor and/or attorney for specific guidance.