Soar to Success June 2015

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By Tina Moe, CPA
If you’re looking to hire someone in your
business but you’re not sure whether to label
them as a subcontractor or an employee,
you need to understand the difference between
the two as it pertains to both tax law and
unemployment insurance regulations.
A subcontractor is self-employed and pays their
own taxes and insurance. I always advise my
clients to obtain a completed form W-9, a copy
of their insurance certificate with a worker’s
compensation rider and if possible, a written
contract outlining the services being provided
and the understanding of both parties involved.
On the other side, an employee has taxes
withheld and you, the employer, pay taxes
on their behalf. In fact, you pay ½ of their
Social Security and Medicare taxes where the
subcontractor pays it all. The employer also
pays both federal and state unemployment
tax on their wages as well as worker’s comp
insurance. Employees fill out forms like W-4,
I-9, and other documents which determine
their withholding preferences and eligibility to
work in the US.
There are several common law rules that help to
determine this answer and they can be broken
down into three categories.
The first category to consider is behavioral
control. Do you control how and when the
work is completed? Do you conduct training
to ensure that it’s done in the manner and
timeliness that you’re looking for? How much
control do you have over work scene? Are you
overseeing the work and giving directives on
tasks and quality? Typically, subcontractors
manage their own work, hours of work and
methods to which the work is performed.
The second category you should consider is
financial control. Do you control the financial
aspects of the work to be conducted? In other
words, do you make the decisions regarding
equipment investments, material costs and
other costs associated with conducting the
work? Do you reimburse your worker for those
expenses? If you’re reimbursing someone or
you’re controlling the costs, more than likely
you have an employee-employer situation.
The third category is the perceived relationship
between you and your worker and how you both
view the situation. Does your worker consider
themselves an employee or a subcontractor?
Do they work for other people providing the
same services or are they working exclusively
for you?
Subcontractor vs.
Employee: How to
Determine the Difference
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SOAR TO SUCCESS | JUNE 2015 | Core Business Strategies