Employees vs. Subcontractors
Posted by Tax Shack on January 25, 2012
The most frequent question we are asked by small business owners is:
Should I hire employees or use subcontractors? What is the difference? So here is the answer as simply as I can put it:
A subcontractor is somebody you hire to do the things that you and/or your employees don’t do in the regular course of your business.
Example 1: You are a party planner and you want to start offering catering, but you don’t do catering. You could subcontract the catering out because it is outside the scope of your usual party planning duties.
Example 2: You own a retail pet store and you would like to start offering pet grooming. You could subcontract the grooming out because it is outside the scope of selling pet food and accessories.
These are just examples. The truth is that sometimes the lines are not so black and white between Contractor and Subcontractor. It’s a good rule of thumb, though, to look at what kind of position you are trying to fill and to determine if the work is just part of your ordinary business or if it is some kind of specialty.
If you do hire subcontractors, you need to make sure that you keep a very good document trail so that, in case of audit, the state and/or federal government does not come back and decide that your subs are actually employees. You do not want to be on the hook for back payroll taxes!
People you hire as subcontractors should have established their own businesses and keep their own sets of books. They should typically have more customers than just you. You, as the contractor, are permitted to ask to see their business record-keeping. If you ever have doubts about the subcontractors you hire maintaining their own status as a business, ask to see their books.
The reason it is so important to keep good records of your subcontractors is that many small business owners use subcontractors as a way to avoid paying payroll taxes. When you use subcontractors, you are not liable for any payroll taxes in relation to the monies you pay them. State agencies are really cracking down on the misuse of subcontractors now and they are coming after small business owners for back payroll taxes! If you truly have a Contractor/Subcontractor relationship, then you should be fine in the case of an audit. So always be sure to keep good records to protect yourself and your business!
LINKS:
Labor & Industries, Guide to Independent Contractors
Labor & Industries, Avoiding Liability for your Subcontractor’s Unpaid Premiums
Labor & Industries, Employer Audit Self-Service Library
Publication 334, Tax Guide for Small Businesses
Tips for Hiring Subcontractors
