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For the employee, the company withholds income tax, Social Security, and Medicare from wages paid. For the independent contractor, the company does not withhold taxes. Employment and labor laws also do not apply to independent contractors.
The basic test for determining whether a worker is an independent contractor or an employee is whether the principal has the right to control the manner and means by which the work is performed.
The determination of whether an individual is an employee or independent contractor depends upon whether or not a "employer-employee" relationship exists between the payer and the payee. Normally an employee is subject to the direct supervision of their employer who controls the manner in which tasks are performed.
Even though their pay can vary depending on the terms of their contracts, employees normally do not have the chance to profit from their work. Independent contactors may have the chance to profit or incur losses from their work. They can set their own prices and normally incur expenses to complete the work.
Employees have to personally do the work they have been assigned and cannot decide to hire helpers or assistants without the express consent of the payer. Independent contractors and freelancers do not personally have to carry out the work for which they have been hired.