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 Arizona, as in other states, the distinction between an independent contractor and an employee is significant for tax and legal responsibilities. Independent contractors, often referred to as freelancers, operate under a different set of regulations compared to employees. They are responsible for paying their own Social Security and Medicare taxes, known as self-employment taxes, because they are not on an employer's payroll. The hiring party does not withhold income taxes from payments made to independent contractors. Proper classification of a worker as an independent contractor or an employee is crucial and is determined based on the IRS's right-to-control test. This test evaluates factors such as the degree of control the hiring party has over the way the worker performs their tasks, the financial control over the business aspects of the worker's job, and the relationship between the parties, including the permanency of the relationship and the provision of employee-type benefits. Misclassification can lead to legal consequences and penalties. It is advisable for both parties to review the IRS guidelines and, if necessary, consult with an attorney to ensure proper classification and compliance with tax laws.