Many employers have elected to hire subcontractors as a way to reduce costs and reduce liabilities. This can be an effective tool, but knowing the difference between what the IRS and other government agencies consider as an employee and a subcontractor is extremely important. If a subcontractor is found to fit certain criteria, they may actually be legally considered an employee and this could leave employers open to stiff fines and penalties from the IRS and even liable for back wages and benefits.
Subcontractor Definition Many employers consider a subcontractor anyone they hire a job out to that is not hired as an employee and pays their own income and withholding taxes. This could be temporary help through an agency or a free-lance entity who charges a fee or commission for their services. Although that may seem to be the case, the IRS has set guidelines on what they consider to be a subcontractor as do state labor and industries and unemployment agencies.
To be a subcontractor or independent contractor under the IRS definition has many different aspects, mostly to do with how the subcontractor and business relationship applies to the work being performed. In general, the definition of a subcontractor is someone who is paid only for the result of their work, not when and how it is done. Here are a few examples of what the IRS uses to help determine an employee versus an independent contractor.
-Directions and training. Subcontractors are generally not trained or given specific directions on where and how the job is to be performed. They are hired for their expertise and are allowed to complete the job as they see fit as long as it meets the final results of the contract for service.
-Hours and workspace. The subcontractor should determine the amount of hours and where they are performed. If a business requires that they perform a certain amount of hours per week or that they do all work on-site, they may be considered an employee.
-Tools, equipment, and expenses. Subcontractors generally pay for their own expenses and provide their own tools and equipment. If you are providing reimbursement for expenses or having them use your equipment, they are more likely employees.
-Length of service. Any contractor that performs work for you for a substantial amount of time or at reoccurring intervals may be considered an employee. Also, the more important that contracted work performed is to a businesses success can also determine that they are considered employees.
The IRS uses a 20-point test to determine whether someone should be considered an employee or independent contractor. They main points to consider is that contractors are hired to perform a specific job based on the results, not how it is performed. They can hire their own employees; work whatever hours and wherever is needed, and are hired by other businesses and individuals to perform services outside of yours. Any limitations to how they and when they perform, who they can hire and where they can complete their work may potentially be construed as an employer/employee relationship.
Other Considerations Beyond the IRS, there are other entities to check with on definitions of subcontractors. OSHA and other worker rights agencies may have stipulations you must adhere to. To protect yourself from liability, talk with a lawyer to understand insurance requirements for job safety concerns. Having your subcontractors responsible for their own insurance in your contract could save you from costs if the contractor is at fault.
Hiring a subcontractor can save you money and time versus hiring a person to do a specific job. Just be aware that just because you or they think they are subcontractor does not make it necessarily so in the eyes of the IRS, the state government or the courts.