Every contractor understands the advantage of getting work done with subs rather than employees. Employees come with headaches like payroll taxes (F.I.C.A., F.U.T.A., S.U.I), employee insurance, fringe benefits and overtime. Collectively, those add about one-third to labor cost. With subcontractors, you simply write a check payable to the sub. No withholding tax. No fringe benefits. No overtime.
Simply labeling someone a subcontractor doesn’t work. In fact, no single test settles the matter. States and the I.R.S. apply their own rules. But all would agree that most employees:
- Work under employer control and can be laid off.
- Comply with work hours and the sequence of work set by the employer.
- Can’t substitute someone else to do the work.
- Are paid by the hour, week or month rather than by the job.
- Use the employer’s tools and get reimbursed for expenses.
Subcontractors are in business for themselves. They:
- Promote their services and have a business address.
Usually work under contract for several prime contractors.
Work for a contract price and cover their own job expenses.
Have to redo unsatisfactory work at their own expense.
Stand to make a profit or suffer a loss on the job.
What’s the risk of misclassification?
Make a mistake about who’s a sub and who isn’t and you could get hit from two directions. The employee could file I.R.S. Form 8919 to collect unpaid Social Security and Medicare Tax on wages. Then your state and the I.R.S. could claim a tax lien for failure to withhold. The I.R.S. can be a pit bull when collecting delinquent payroll tax – including seizure of personal assets.
Use written subcontracts to end any debate about employee classification:
- Payment will be by the job.
- You control only the finished product.
- Subs are responsible for their own taxes.