Employee-Subcontractor - What is the Difference?

Many people in the business world are not sure what the difference between an employee and subcontractor is. Although they may do the same tasks, the difference is vast. If you list them inappropriately, the IRS can audit you and claim you owe them a lot of money. This has happened in many businesses and many of them couldn't afford to pay all the costs and had to close. To avoid this from happening to your business, you need to know the differences between the two. You can figure this out by asking yourself a few questions regarding the working habits of the individual you hired.

The easiest way to tell the difference between an employee and a subcontractor is to ask whose rules the person follows. If they have to follow your rules, then you have an employee. A subcontractor typically decides how a project is to be done. Another way you can tell the difference between an employee and a subcontractor is whether there was on site training. Subcontractors don't require training because they already know how to do their job, which is why they were hired in the first place. If you trained the individual in question, then you have to classify them as an employee.

You also can tell the difference between an employee and a subcontractor by considering his or her assistants. If your company was in charge of hiring the assistants, then the individual is an employee. Subcontractors have the freedom of choosing who works with them on their projects. If this is the case, then the subcontractor also is in charge of paying those assistants. There are deciding factors as to whether someone is an employee or not that can be viewed for both sides. If you are positive an individual is a subcontractor, make sure you document everything properly.

For example, the IRS typically views an individual who has to work within a set period of times as an employee. This may not be the case for you because there are times when subcontractors have to work with the regular employees. Make sure you document this need so the IRS can see you have a subcontractor, not an employee. Another time you will need proper documentation to prove you have hired a subcontractor is if you use this person for a long period of time. The IRS views long-standing relationships with workers as employees. The reason you may always go back to this individual is because you like their work. Make sure you are able to prove the difference.

There are other factors in determining whether you have an employee or a subcontractor, but these are some of the major ones. If you still aren't sure, and you are afraid the IRS will audit your business, your best plan is to document everything and get as much information you can about employees and subcontractors. You don't want to lose your business because you weren't sure whether you had an employee or a subcontractor.

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Employee-Subcontractor - What is the Difference?