Employees vs. Subcontractors: What’s the Difference?

Most small business owners need assistance in performing their companys daily operations. The terms of your working relationships with the individuals you hire to help out will determine whether you treat them as employees, who are linked to your company in complex ways, or as subcontractors, who are independent operators responsible for their own taxes and bookkeeping. The determination has implications for your tax liabilities as well as your obligations and commitment to the individual worker. It also determines whether hes entitled to benefits such as unemployment insurance.

When you enter into a business relationship or transaction, you agree to provide a product or service in exchange for a sum of money. Youre acting as a contractor, whether or not youve created and signed an actual contract with your client. If you hire someone else to perform some of the work you have promised to deliver, you create an implicit or explicit contract within a contract, or a subcontract. As a business owner, you may pay both employees and independent subcontractors to perform work for you.

Work arrangements governing when to treat a worker as a contractor or subcontractor and when to treat him as an employee are complex and multifaceted. Even the IRS tiptoes around the issue, providing general guidelines rather than rules. Despite the agencys vagueness, its agents are quite serious about implementing and enforcing regulations concerning whether to treat a particular worker as an employee or a subcontractor.

State guidelines can be more specific. New York State, for example, explains that if a person who performs a service for you makes autonomous decisions about how to perform that work, he can be considered a subcontractor. But if you dictate the terms and specifics of how he works, hes an employee. For example, if you tell a worker simply to dig up a customers yard and let him use any tools he has available, hes a subcontractor. But if you tell the same worker to use a rototiller and start on the east end of the yard, hes more likely to be considered an employee.

The financial criterion determines control over the financial resources required to get a job done. When an employee drives his own car in the course of performing a job, its reasonable for him to expect his employer to reimburse him for driving these miles; however, when a contractor or subcontractor does the same thing, his transportation expense is his own responsibility.

In addition, the IRS uses a relationship criterion to determine whether a worker is legally an employee or a subcontractor. The relationship between employer and employee is more complex and extensive than that of business owner and subcontractor, and may include perks such as health insurance and an ongoing commitment to provide a specified number of hours.

Is there a difference between an employee and a subcontractor? If a worker is an employee you are responsible for withholding and paying the employment-related taxes. If your worker is a subcontractor, he is responsible for keeping his or her own records and paying his or her own income and self-employment

Use Schedule SE (Form 1040) to figure the tax due on net earnings from self-employment. The Social Security Administration uses the information from Schedule SE to figure your benefits under the social security program.

https://www.irs.gov › forms-pubs › about…


The Difference Between Employees and Sub-Contractors

What is a subcontractor?

A subcontractor is a person who works for a contractor. A contractor is a person or company who works with businesses on a contract basis and is paid for completing projects. Like contractors, subcontractors are self-employed, and they can help contractors on projects that require additional help or skills to complete. Subcontractors often possess specialized skills for their industries, which often include construction, technology, retail and creative fields. Working as a subcontractor might provide benefits like more flexible scheduling and greater specialization within your field.

Subcontractors can contribute skills and expertise to a companys specific, short-term projects. A subcontractor might be best for your company if you need work done that is not essential to your company or that you do not need to supervise. Hiring a subcontractor can also be effective for small businesses to get expert help on specific tasks before they hire several employees. Enlisting help from subcontractors rather than hiring employees can help to reduce costs.

What is an employee?

An employee is someone who works for an employer on either a full-time or part-time basis. Employers usually hire employees to fill permanent positions and work on long-term projects and tasks essential for the companys operations. Employees receive pay and benefits from their employer, including insurance plans, vacation time and more. Typically, employees receive specific assignments that they must complete in exchange for hourly or salaried pay.

Employees usually form long-term relationships with their employers, management and team members. These relationships can help them work more efficiently on projects with similar structures, know who to contact for assistance or specific questions and develop skills over the long term with professional feedback. You might apply for positions as an employee if youre looking for consistent work and pay or healthcare and insurance benefits.

An employee might be the right fit for your company if you need someone to complete work that is essential to the mission of your company or if you have a long-term position that needs to be filled. You might hire an employee if you want to have more supervision or control of the employees work.

Employees vs. subcontractors

Employees and subcontractors can perform similar types of work, but there are important differences between the two. Understanding how they are different can help you determine which working situation might be a better fit for your career, or whether your company should hire an employee or a subcontractor. Here are some of the key differences between employees and subcontractors:

Work schedule

One difference between employees and subcontractors is their work schedules. Employees usually have a predetermined work schedule set by their employers, although certain jobs can offer flexibility. Subcontractors, however, control their work hours, as they operate separately from the company. Subcontractors may take time off between jobs, while employees may not be able to take frequent time off between different assignments.

Project type

Whether an employee or a subcontractor would be a better fit for a certain situation can depend on the type of project. A company working on a long-term project or program may find that hiring an employee provides stability and budget efficiency. A company looking for extra help on a short-term project may hire a subcontractor to avoid the long-term costs of a permanent employee. Companies typically train their employees thoroughly, but subcontractors usually have experience in their field and dont receive training.


Pay structure

The pay structure of subcontractors and employees is also very different. Companies pay employees consistently with set pay periods. Subcontractors receive pay once they finish the job theyre working on. Employees have their pay rate set by their employers, and it usually remains consistent from paycheck to paycheck. Subcontractors can set their own pay rates depending on their industry, experience and geographic area.


Employees usually receive a benefits package through their employer. Employee benefits can include insurance plans, paid time off and healthcare. Subcontractors dont receive benefits from their contractors or from the companies they work with.


Another important difference between the employees and subcontractors is how they get the resources to do their jobs. An employer generally provides employees with the resources they need to do their jobs, including a place to work and necessary equipment. Subcontractors usually provide their own tools and supplies.


The consistency of available work for employees and subcontractors can also vary. Employees usually work consistently as long as they are employed, since the company has permanently hired them. Subcontractors may experience gaps between projects since they work on a temporary contract basis. However, subcontractors can work for more than one contractor, so they can schedule work for more than one project at a time to fill calendar gaps.


Another key difference between employees and subcontractors is their relationship with the company. Companies can usually think of their relationships with contractors and subcontractors as business-to-business relationships, usually relatively short-term relationships that only span the length of the project. Companies relationships with their employees are generally more permanent, and can involve professional development, advancement and training.


What is the difference between subcontractor and employee?

In short, someone who sets their wage, hours, and chooses the jobs they take on is a subcontractor, while someone whose employer specifies their wage, hours, and work tasks is an employee.

Is it better to have employees or subcontractors?

With employees, you’ll have more control, but more compliance obligations. With contractors, you’ll have less compliance obligations, but less control. In the end, it doesn’t really matter what you say, it matters what the IRS says.

Are subcontractors considered payroll?

Key takeaway: Independent contractors are not employed by the company they contract with; they are independent as long as they provide the service or product agreed to. Employees are longer-term, on the company’s payroll, and generally not hired for one specific project.

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