What is the difference between employee and independent contractor for tax purposes?

In India, the tax treatment for employees and independent contractors differs as per the Income Tax Act, 1961.

For employees, their employer is responsible for deducting taxes from their salary and paying it to the government. The employee receives a Form 16 which contains the details of the tax deducted at source (TDS) by the employer. The employee then files their tax return and claims any deductions and exemptions they are eligible for.

On the other hand, independent contractors are responsible for paying their own taxes. They are required to file their tax returns and pay taxes directly to the government. Independent contractors are also eligible to claim business expenses as deductions while computing their taxable income.

It is important for small business owners to correctly classify their workers as employees or independent contractors to ensure compliance with tax laws and avoid any penalties. The classification is based on the nature of the work relationship and the degree of control exercised by the employer over the worker.