Subcontractor Vs. Employee: What is the difference?

For organizations across the globe, understanding the distinction between subcontractors and employees is crucial. Subcontractors and employees may seem similar as both provide services, but their legal and tax implications vary greatly. This understanding not only ensures the smooth running of operations but also safeguards the company from potential legal consequences.

Are subcontractors employees?

The most significant difference between subcontractors and employees lies in their relationship with the organization. A subcontractor is an independent entity providing services to a business under contract, whilst an employee is hired by a business and is paid wages or a salary. Employees are hired by the company directly under an employment contract, whereas subcontractors are employed on a contractual basis for a specific project or period.

What makes someone a subcontractor?

Several factors distinguish someone as a subcontractor. First, they have autonomy over how they conduct their work. By providing their own tools or equipment, they also assume some risk and may even hold an independent business license. Moreover, they invoice for their services and pay their own taxes rather than having them deducted from a paycheck.

When engaging with subcontractors, organizations have limited control over them. The company outlines what it needs done, but it doesn’t dictate how the subcontractor completes the task. On the other hand, businesses exercise substantial control over employees – they decide when, where, and how tasks should be completed.

What is the downside to subcontracting?

Despite its advantages, subcontracting isn’t without drawbacks. While it reduces staffing costs and overheads, it increases risks related to quality control as the employer has less supervision over a subcontractor compared to an employee. Furthermore, issues may arise with respect to protecting sensitive information and ensuring nondisclosure.

Is it better to have subcontractors or employees?

Determining whether to hire subcontractors or regular employees depends on various factors such as the frequency of work, work control and method of payment. It’s worth noting that subcontractors are often hired for expertise in specific areas and offer flexibility in the workforce. On the other hand, employees can provide a sense of continuity to your business operations.

There are distinct tax implications for each category too. Businesses must withhold taxes for their employees, contributing to Social Security and Medicare (FICA) expenses and unemployment insurance (FUTA). For subcontractors however, employers are under no obligation to withhold taxes; it is the subcontractor who bears sole responsibility for their tax obligations.

From a benefits perspective, companies usually offer healthcare insurance, retirement savings plans (like 401K), vacation time and sick leave to employees. These benefits do not extend to subcontractors as they operate independently from the organization, they provide services to.

Onboarding methods also highlight this differentiation. For employees, companies typically impose an in-depth onboarding process with regular training programs to ensure efficiency and compliance to company’s rules and standards – this includes signing employment contracts that highlight job descriptions and responsibilities. Subcontractors enter service contracts with businesses specifying the nature of services rendered – they are expected to use their expertise for specific tasks without any training from the hiring company.

When payroll processing comes into consideration, employers must regularly pay their employees according to established schedules (weekly, biweekly, or monthly). Subcontractors get paid depending on terms specified in individual contracts – this could be upon project completion, after achieving certain milestones or based on a negotiated payment schedule.

Misclassification of workers can lead to hefty fines and legal entanglements. It’s thus crucial for employers to clearly identify their workforce as subcontractors or employees. The IRS provides three criteria – behavioral control, financial control, and relationship – to help assess the classification.

Behavioral control assesses if the company controls or has the right to control what a worker does and how they do it. Financial control relates to whether an employer controls the business aspects of the worker’s job. Lastly, the relationship criterion revolves around written contracts, employee benefits, permanency of the relationship, and services provided being key to regular business activities.

This convenient chart can help you distinguish between the two:

An employee:

• Works according to a specified time and place set by you, the employer.
• Usually works exclusively for one company.
• Receives training.
• Uses your tools or other work-related resources.
• Performs work that is fundamental to your business.
• Is subject to a significant level of control by you.
• Is typically paid a salary or hourly wage.

Why is this important? Because employees…

• Often receive employee benefits, such as health insurance and paid time off.
• Are subject to financial deductions like income tax and Social Security tax, among others.
• May become union members.
• Are protected by state and federal laws regarding overtime, minimum wage, and employment discrimination.

An independent contractor:

• Can work whenever and sometimes wherever they want.
• Can work for multiple companies simultaneously or over the course of a year.
• Is not trained by the employer, but rather hired for their expertise.
• Uses their own tools and resources.
• Controls their own method of work.
• Is often (but not always) paid on a per-project or flat-fee basis.

Why is this important? Because contractors…

• Do not receive employment benefits.
• Are responsible for their own taxes and are not subject to other withholdings.
• May not join a union.
• Generally, do not receive overtime pay or protection against employment discrimination.

The classification of your worker affects how you pay them, handle taxes, and structure your working relationships. Here’s a brief breakdown: