Employee vs. Subcontractor:
What's the Difference and Why You Should Care
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 coverage, such as paid time off and health insurance
- 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. This can result in major problems down the road, especially if the worker files an unemployment claim or doesn’t pay their own self-employment or income taxes, or if the business is audited by the IRS or DUA (Department of Unemployment Assistance). There may be serious workers' compensation issues if the worker opens a claim against the company’s policy. Liability may also be an issue, especially if the worker does not carry their own general liability insurance or does not have sufficient coverage.
- Employee vs. Subcontractor
- IRS Guidelines
- Working with Independent Contractors
- Resources and Links