Employee vs. Subcontractor:
What's the Difference and Why You Should Care
If you want to calculate out an employee's real hourly rate, after taxes, benefits, and overhead costs, check out What's the Real Cost of an Employee? (online calculator)
Correctly determining whether someone is a subcontractor or an employee has many important consequences for your business.
It will affect:
- Company FICA, FUTA and SUTA payments
- Workers' Compensation insurance cost
- Liability insurance cost
- Benefits, such as paid time off and health insurance
- Other expenses, including training, office space or equipment
- Quarterly and/or year-end filing with the state and IRS
- What kind of records you must keep
Businesses may receive significant economic benefits by working with independent contractors instead of hiring employees.
These include reduced or no employer contribution to FICA, FUTA or SUTA, no need to provide benefits, tools and equipment or training, and no need to keep paying someone when a job is completed or pay out against unemployment claims.
Because of this, many businesses have classified workers as independent contractors when they should treat them as employees.
Incorrectly classifying a worker can be very expensive for a business.
If the business is audited by the IRS or Department of Unemployment Assistance (DUA), or the worker does not pay their own self-employment or income taxes, the company may be responsible for those taxes, plus interest and penalties.
There may be serious workers' compensation issues if the worker is injured and opens a claim against the company’s policy. Even if they are not injured, most insurance companies will require you to cover ALL subcontractors under your policy unless you can show they have separate coverage.
Liability may also be an issue, especially if the worker does not carry their own general liability insurance or has insufficient coverage. If they cause an accident, damage your equipment or premises or injure someone else while performing work for you, you may be the one paying for it.