An employer is responsible for collecting withholding taxes from the paychecks of its employees. The employer is also responsible for payment of certain taxes including FICA for Social Security and Medicare and usually workers compensation and certain other payments required by some states. They may also pay for and provide benefits, typically including vacation pay, holidays, and health insurance. An employer is responsible for paying overtime when required by overtime laws.
Certain companies, most notably Microsoft, have recently had their contractor hiring practices challenged. Challengers maintain that people claiming to be self-employee contractors were in fact employees. That would require payment of employment taxes plus back payments for vacation, holidays, and other benefits routinely provided to employees. To avoid such challenges, employers are increasingly hiring temporaries who work for employment agencies. These temps are employees of the temp agency and cannot be construed to be employees of the temp agency's client.
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