Employees vs. Subcontractors: What’s the Difference?

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…


Most small business owners require assistance to carry out the daily operations of their businesses. Depending on the terms of your agreements with the people you hire to assist you, you will either treat them as employees who are intricately connected to your business or as independent subcontractors who are in charge of their own taxes and bookkeeping. The decision affects both your tax obligations and your obligations and commitments to the specific worker. It also establishes his eligibility for benefits like unemployment insurance.

When you engage in a business relationship or transaction, you consent to exchange a good or service for cash. Whether or not you have created and signed an actual contract with your client, you are still acting as a contractor. If you employ a third party to complete some of the work you have committed to completing, you thereby establish an implicit or explicit subcontract. You can pay both employees and independent subcontractors as a business owner to do work for you.

Work arrangements governing when to treat a worker as an employee versus a contractor or subcontractor are intricate and multifaceted. Even the IRS skirts the problem by offering broad guidelines rather than specific rules. The agency’s agents are very serious about implementing and enforcing rules regarding whether to treat a specific worker as an employee or a subcontractor, despite the agency’s ambiguous designation.

State guidelines can be more specific. According to New York State, for instance, a person who performs a service for you may be regarded as a subcontractor if they make independent decisions regarding how to complete the work. But if you set the conditions and guidelines for his employment, he becomes an employee. A worker is a subcontractor, for instance, if you tell him to simply dig up a customer’s yard and allow him to use any tools he has on hand. However, he is more likely to be regarded as an employee if you instruct the same worker to use a rototiller and begin on the east end of the yard.

Control over the financial resources necessary to complete a task is determined by the financial criterion. While it is reasonable for an employee to expect his employer to reimburse him for the miles he drives while on the job, this is not the case for contractors or subcontractors, who are required to cover their own transportation costs.

To further determine whether a worker is legally an employee or a subcontractor, the IRS also applies a relationship criterion. Unlike the relationship between a business owner and a subcontractor, the relationship between an employer and an employee is more intricate and extensive. It may also include benefits like health insurance and a continuing obligation to work a certain number of hours per week.

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 business that performs projects for businesses under contract and is compensated for doing so. Subcontractors can assist contractors on projects that need additional assistance or expertise because they are self-employed like contractors. For their industries, which frequently include construction, technology, retail, and the creative industries, subcontractors frequently have specialized skills. Benefits of subcontracting may include more flexible scheduling and increased specialization in your field.

Subcontractors can contribute their knowledge and abilities to a business’s particular, urgent projects. If your business needs work done that is not absolutely necessary or that you do not need to supervise, a subcontractor might be the best option. Before they hire numerous employees, small businesses can also benefit from using subcontractors to get specialized assistance on particular tasks. Cost-saving measures include using subcontractors rather than hiring employees.

What is an employee?

A person who works full- or part-time for an employer is referred to as an employee. Employers typically hire personnel to fill long-term positions and carry out tasks that are crucial to the business’ operations. Employees are paid and receive benefits from their employer, such as insurance policies, paid time off, and more. Employees typically receive specific tasks to complete in exchange for hourly or salaried pay.

Employees typically develop lasting bonds with their employers, managers, and fellow team members. These connections can facilitate their work on projects with comparable structures, let them know who to turn to for support or specific inquiries, and let them receive long-term professional feedback on their skills. If you’re searching for jobs as an employee with benefits like stable employment, pay, and health coverage, you might apply.

If your company needs someone to complete work that is crucial to its mission or if you have a long-term position that needs to be filled, an employee might be the best choice. If you want to exert more control or supervision over the work of your employees, you might consider hiring one.

Employees vs. subcontractors

Although employees and subcontractors can carry out similar tasks, there are significant distinctions between the two. Your career may benefit from one over the other depending on their differences, and knowing the distinctions can help you decide whether to work for a company as an employee or a subcontractor. The following are some significant distinctions between workers and subcontractors:

Work schedule

One difference between employees and subcontractors is their work schedules. The majority of the time, employers set an employee’s schedule, though some jobs may allow for some flexibility. However, because they work independently from the business, subcontractors have control over their working hours. While employees might not be able to frequently take time off between different assignments, subcontractors frequently take time off between jobs.

Project type

The type of project can determine whether an employee or a subcontractor would be more appropriate for a specific circumstance. When a business is working on a long-term project or program, hiring an employee can provide stability and cost-effectiveness. In order to avoid the long-term costs of a permanent employee, a business seeking additional assistance on a brief project may hire a subcontractor. Subcontractors typically have experience in their field and do not receive training, despite the fact that businesses typically give their employees thorough training.


Pay structure

Subcontractors and employees are paid very differently from one another. Companies pay employees consistently with set pay periods. Subcontractors are paid when the project they are working on is complete. Employers determine the pay rate for their employees, and it typically doesn’t change from one paycheck to the next. In accordance with their industry, level of expertise, and location, subcontractors can determine their own pay rates.


Employees usually receive a benefits package through their employer. Benefits for employees may include healthcare, paid time off, and insurance plans. Subcontractors are not compensated by their employers or the businesses they work for.


How employees and subcontractors obtain the resources necessary to complete their jobs is a key distinction between the two groups of people. In general, an employer gives workers the tools they need to do their jobs, such as a workspace and essential supplies. Subcontractors usually provide their own tools and supplies.


Work availability for employees and subcontractors can also change over time. Since they were hired permanently by the company, employees typically put in consistent work throughout their tenure there. Due to their temporary employment status, subcontractors may encounter delays between projects. However, because they can work for multiple contractors, subcontractors can schedule work for multiple projects at once to fill in gaps in the schedule.


The way in which subcontractors and employees interact with the business is another important distinction. Typically, businesses can think of their relationships with contractors and subcontractors as being business-to-business relationships that only last as long as the project. In general, business relationships with employees are more long-term and can include professional growth, advancement, and training.


What is the difference between subcontractor and employee?

In essence, a subcontractor is someone whose employer sets their pay, hours, and work assignments, whereas an employee’s employer specifies their pay, hours, and work assignments

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, what the IRS says is more important than what you say.

Are subcontractors considered payroll?

Conclusion: Independent contractors are not employees of the business with which they have a contract; they are independent as long as they provide the agreed-upon service or product. Employees are hired for a longer period of time, on the company payroll, and typically not for a single project.

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