As a business owner, you want to hire the best at the lowest cost. Often, businesses hire subcontractors to save money but it is important to know the differences between a 1099 subcontractor and an employee.
What is a 1099 Subcontractor?
A 1099 subcontractor simply someone who works for you but is not your employee. This type of worker gives the business flexibility and is often less expensive because the 1099 subcontractor is responsible for their own benefits, employment taxes, and pay for their own supplies and overhead.
What Constitutes Employee Status?
An employee is classified as someone who the business must withhold income taxes, pay social security, unemployment tax on wages paid, and Medicare taxes. This type of worker is typically provided training and has set rules for their time at the company.
What are the Differences?
There are a few characteristics of a 1099 subcontractor that differ from a regular employee. These differences include behavioral control, financial control, and the relationship of the parties.
For instance, according to the IRS
, behavioral control is simplified by how you direct the worker. If you have specific rules such as what is to be worn, specific hours that the worker must adhere to, and provide training and instructions then this is an aspect of behavioral control that depicts an employee instead of a subcontractor.
Let’s say that you hire someone to fix your roof at the business. This worker is not told specific hours, a specific dress code, or what materials to use. This worker is an example of a subcontractor.
However, if you hire a person to work the front desk and train them, tell them the dress code to follow, the hours to be there, and what to do – then this usually depicts an employee.
An example of what may be a subcontractor is one who has to rent equipment or make their own investment. High expenses that are not reimbursed are typical of a subcontractor. For example, a business would not reimburse a subcontractor for a concrete mixing machine rental or a backhoe.
Relationship of the Parties
This is where aspects like benefits come in. If your company is covering paid vacations, health insurance, and a pension – that person may be an employee. Of course, there are always exceptions since many employees do not have paid vacations or health insurance but are still classified as an employee, not a subcontractor.
The designation of employee or subcontractor status has tax implications for both you and your worker. Employers must pay Social Security and Medicare taxes for employees, while subcontractors are responsible for the self-employment taxes that cover their own Social Security and Medicare contributions. In addition, employers must pay state and federal unemployment taxes as well as state industrial insurance taxes for the workers they list as employees.
A general rule of thumb is that a 1099 subcontractor is only directed in the result of the work, not how it is done or what will be done.
Why Is It Important to Differentiate?
The IRS takes employee status very seriously; classifying workers incorrectly can lead to severe penalties and fees, especially if the incorrect classification was done nefariously.