Employee vs Contractor or Subcontractor

Employee vs Contractor/Subcontractor 

There are many types of workers.  Even under classifications such as ‘contingent’ and ‘employee’, there are a number of types.  Workers can be full-time, part-time, independent contractors, seasonal workers, temporary workers, employees, interns, consultants, leased employees – just to name a few. 

What is an Employee? 

An Employee is a worker who has been hired by a company to do a specific job.  The job is typically specified by means of an offer letter, an employment contract, or a verbal conversation.  When an employee is in a union, the union can assist in negotiating the terms of employment.  Without a union, an employee negotiates their own terms.   

An employer of an employee would deposit and report taxes, such as; federal income tax, social security and Medicare taxes, and Federal Unemployment Tax.  Employees are furnished with a W-2 each year, which provides the employee with information about earned wages, tips and other compensation. 

What is a Contractor? 

A contractor  is an independent entity from the organization, and enters into an agreement to supply goods, services, materials, equipment, or personnel that is specified or stated.  A contractor can also oversee construction sites, manages trades and vendors, or who coordinates projects.  A contractor can work for an organization or can be self-employed.   

An entity who works with a contractor would have the contractor supply different tax forms, such as a W-9, and would need the Taxpayer Identification Number (TIN) for the payee.  An entity would supply the contractor with a form 1099-NEC to report payments to both the IRS and the payee. 

What is a Subcontractor? 

A contractor can hire subcontractors to do any part of the work that they are hired to perform.  They would have their own contract or agreement with these subcontractors.  A subcontractor would work in a specialized area and can be a freelancer, a vendor, or an independent contractor.  They would have a specified fee in their agreement with the contractor. 

The contractor who hires subcontractors would be responsible for filing and reporting requirements for these workers. 

What are the key differences? 

An organization needs to determine whether they are hiring a contractor or an employee, and it is important to make sure to not misclassify employees as contractors. “So, what’s the big deal? You risk a lot by misclassifying your workers. By misclassifying your wedding planner associate as a contractor, you could be facing years in back-taxes and associated penalties. Not to mention, the audit and investigation that leads up to all this.” 

The key differences are outlined by the IRS, and are largely focused on the amount of control the hiring entity has over the worker.  Forms of control include Behavioral, Financial, and Type of Relationship. 

Behavioral – specifically who controls what the worker does.  For example, does the organization provide the worker with a handbook or require that the worker complete timesheets?  This behavior supports that the worker is an Employee. 

Financial – who provides funding for the service being done?  If the worker is providing their own tools and does not submit expenses for reimbursement, this behavior supports that they are a contractor. 

Type of Relationship – often, this is defined in an offer letter or a contract.  It also can include payment of benefits and insurance, such as workers’ compensation or pensions and the expectation of a long-term relationship or a project-based relationship.  If a worker is under the hiring entity’s workers’ compensation insurance, this behavior supports that they are an employee. 

If it is unclear, the IRS has published form SS-8 to determine which bucket a worker falls into.  Simply filling out the form can provide clarity to a hiring entity. 

Where does ESSG fit in? 

Employer Solutions Staffing Group is an Employer and provides critical business services to assist and support operations in the employer-employee relationship.  Our partnership does not interrupt an organization’s day-to-day operations, and the relationships built between our clients and the employees are maintained and nurtured by our clients. If you need to shift your employees from Contractor relationships to Employee relationships, ESSG can help. We can ensure you are compliant with the HR, tax, and safety requirements of having employees. If you have ever thought it was too much of a hassle to have employees, don’t fret, we will make it easy for you.