How do employees differ from independent contractors for tax purposes?

Employees and independent contractors are treated differently in terms of tax responsibilities, which is critical for compliance and financial planning.

Employees have a more structured tax situation. Their employers are responsible for withholding income taxes and payroll taxes, such as Social Security and Medicare, directly from their paychecks. This withholding means that employees often have little to worry about when it comes time to file their annual tax returns, as a portion of their tax obligation is already taken care of throughout the year.

On the other hand, independent contractors operate as self-employed individuals. They do not have taxes withheld from their payments; instead, they are responsible for calculating, reporting, and paying their own taxes. This includes both income tax and self-employment tax, which encompasses Social Security and Medicare taxes for the self-employed.

The distinction in tax withholding and payment between employees and independent contractors clearly highlights the different obligations each group has under tax law. Consequently, option C accurately represents this critical difference, emphasizing the lack of withholding for contractors compared to employees.