A company's obligation to a worker for federal tax purposes depends primarily on whether the worker is an employee or an independent contractor, according to G. J. Stillson MacDonnell, a shareholder at the national labor and employment law firm of Littler Mendelson. "There is no other option," she said.While independent contractor status provides benefits to companies and individuals, it draws hostility from the Internal Revenue Service and state tax agencies, she said.

Since federal employment taxes are imposed only with respect to wages paid to employees, the IRS is the agency responsible for determining whether a worker qualifies as an employee or independent contractor. And since employee status is defined slightly differently for the purposes of the three different employment taxes - FICA, FUTA and income tax withholding - status must be determined separately for the purposes of each, noted MacDonnell, who was formerly chair of the Employment Taxes Committee of the American Bar Association Tax Section.

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