is it legal to save money for contractors so that they can pay their taxes?

Answer 1

I would not trust an employer who claimed to be doing that. They are probably using the money other ways. The whole basis of being a contractor is that the individual is responsible for their own taxes.

Answer 2

under agreeable and signed memo of understanding...a contractor can request that the contracting company deduct a certain percentage of their pay for tax purposes.

It is a rare thing amongst contractors and their contracting companies.
you might want to be careful about that arrangement as some companies might penalize the contractor by deducting money owed to the company if the contractor defaults on a job or does poorly on a job resulting in charge backs or negative company image. It is an added responsibility fr the company's financial officer and again this is not a popular practice as companies treat contractors as a seperate entity having nothing to do with their tax burdens or concerns.

Answer 3

It's just more income to them. They are responsible for paying their own taxes.

However, you should probably prepare for the possibility that YOU may be facing a determination from the IRS based on an SS-8 filing from one of your "contractors". That will be a REALLY quick trip to "Tax Hell" for yourself as you'll have to come up with a year or more's worth of payroll taxes all at once.

My guess is that the plethora of employees filing as independent contractors who have not made their required quarterly estimated tax payments and are far short on Tax Day is going to trigger a massive review of these folks' status by the IRS. If you are paying people that way, best get ready for the storm yourself.