Subcontractors vs. Employees: A Complete Overview
Subcontractors and employees might seem like interchangeable terms, but they are very different in the eyes of employment law and your responsibilities as an employer. The worker you hire can impact your home service business in numerous ways. Sometimes, it might be better to hire a subcontractor, and other times, an employee is suitable. You won’t know who to hire unless you know the difference.
In this resource, we’ll walk you through the biggest differences between subcontractors and employees and how they could affect your business.
What is a Contractor?
A contractor is someone who owns a business that takes on contract work, and who is considered self-employed––that’s probably you!
The contractor is generally the person who signs the initial contract with a client and who is responsible for managing and completing any work.
A contractor’s job includes getting more contracts, delegating work, overseeing administrative tasks like invoicing, managing client relationships, completing work, and performing duties associated with the service business (general contracting, lawn maintenance, painting, plumbing, etc.) they own.
A contractor may hire subcontractors or employees depending on what type of commitment they want from their workers.
READ MORE: Learn about the difference between contractors and handymen
What is a Subcontractor?
A subcontractor works for a contractor. They are hired to complete tasks in a project that the contractor can’t do themselves. Sometimes they need help because of personal license restrictions, out of scope work, or for extra assistance.
For example, a contractor who owns a lawn care business may hire a subcontractor to mow lawns or shovel snow for clients while the contractor manages dispatching and scheduling.
A subcontractor is able to accept or reject jobs offered to them by a contractor. They are able to provide their time estimates for the project. The price of the job is usually controlled by the contractor.
Subcontractors are considered self-employed and are responsible for their own taxes, supplies, health benefits, and more.
Subcontractors are most common in highly seasonal industries such as:
- Lawn care
Pro tip: Typically, subcontractors want to complete as much work as possible in as little time as possible. They may quote you on a shorter time frame than an employee would.
What is an Employee?
An employee works for an employer (in this case, a contractor) on a consistent, permanent basis. They can be either full-time or part-time.
An employee is not considered self-employed, and their employer is responsible for providing health benefits, vacation and sick days, work supplies and equipment, as well as deducting taxes from their pay.
An employee is generally not able to accept or reject certain jobs as they please. Usually, they must complete any work assigned to them by an employer. In return, they are paid either hourly or through a salaried amount on an ongoing basis.
What is the Difference Between an Employee and a Subcontractor?
According to the IRS, “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
Alternately, “You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.”
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.
This chart helps to showcase the main differences between employees and contractors:
|A Subcontractor||An Employee|
|Pays their own taxes||Has taxes deducted automatically by their employer|
|Provides their own supplies, office space, and equipment||Is given supplies, office equipment, and a workspace by their employer|
|Sets their own hours||Is given work hours by their employer|
|Sets their own wage||Is paid a wage determined by their employer|
|Can reject or accept jobs||Can’t reject tasks or jobs|
|Is not entitled to health benefits, vacation or sick days, or unemployment benefits through the contractor||May be entitled to health benefits, vacation and sick days, and unemployment benefits through their employer|
|Can work for multiple contractors||Usually only works for one employer|
|May not be offered consistent work||Is hired on a permanent basis|
|Is paid after a job is finished||Is paid on a consistent basis (for example, bi-weekly)|
Tax forms for subcontractors vs. employees
Contractors and employees are handled differently according to tax and employment laws. Subcontractors pay their own employment, social security, and medicare taxes, while employers must pay these taxes for their employees. As a business owner you must provide W-2 forms to your employees, and 1099 forms to your subcontractors.
Subcontractors are responsible for paying their own taxes and employees are not. As a business owner, it’s your responsibility to provide these forms to your employees and understand the differences between them.
The forms for employees and subcontractors differ in the US and Canada:
- Provide W-2 forms (a T4 slip in Canada) to employees in the US at the end of each year for tax purposes. It’s your responsibility to file them in the new year with the IRS (or the CRA in Canada).
- Complete a W-9 for from every non-employee (subcontractor) before sending them a completed 1099-MSC form (information below). This form gives you the non-employee’s valid tax ID number and address, which is necessary for completing a 1099-MSC form.
- Complete a 1099-MSC form to every subcontractor that you have paid $600 or more during the calendar year. You must report this expense, and the subcontractor must report their income to the IRS. This helps to determine how much they owe in taxes, as they are not automatically set aside by an employer.
You must send these forms to employees and non-employees (subcontractors) by January 31st of the following calendar year.
As the employer, you must file your taxes for employees before February 28th, and non-employees (subcontractors) must file their taxes by February 28th of the following calendar year.
READ MORE: 30 small business tax deductions to save money when filing
Differentiating subcontractors vs. employees
Subcontractors and employees serve different purposes and needs within your business. Subcontractors are best for projects that require specific skill sets, while employees are great for on-going, long term projects. However, they don’t have to be mutually exclusive in your small business.
You can choose to hire one or the other, or a mix of both, depending on your industry and growth goals.
The most important thing is to understand the difference between the types of workers. This helps you ensure that you’re not setting unreasonable expectations. It’s also important to understand so that you avoid making mistakes in employment and tax laws.
Knowing what your obligations and responsibilities are to the people you hire makes you a better entrepreneur, whether you’re acting as a contractor or employer.
*Disclaimer: this article should not be considered tax advice, and you should not rely on using it do file your taxes. Seek professional guidance for assistance when filing your taxes.