Most people don’t realize that there’s a difference between employees and sub-contractors in Indiana. They don’t receive the same legal protections from the government and don’t have the same rights. Whether you’re an employee or a sub-contractor, you need to spend some time studying the rules and regulations regarding your position and become aware of your rights. If you’re a business owner, it’s even more crucial to distinguish between the two because you have some tax liabilities and obligations.
The Difference Between Employees and Sub-Contractors
Both employees and sub-contractors provide services to you and both get paid for their services. That’s the only commonality between the two types of associates. The IRS states that you can distinguish between employees and subcontractors based on three different categories and they are:
• Behavioral Control – This determines how much control you have over how the job is done. You will provide instructions, methodology, training in that methodology, and directions on how and when to carry out the job. If you have this control, the individual performing the job is an employee. If you don’t have this control and can only decide when and where the job is to be done, the person performing the job is a sub-contractor.
• Financial Control – If you have more financial control over how and when the worker is paid, how they’re reimbursed for equipment used and services rendered, and who bears the profits and loss, etc. An employee can fully expect the employer to reimburse them for wear and tear of the equipment they bring to the job. For example, if the employee drives to different locations in their personal car to perform their job, the employer can be expected to pay for the fuel, maintenance and repairs. However, the sub-contractor must pay all of these expenses out of their pocket. These expenses aren’t considered the business owner’s concern.
• Relationship between the Parties – The most significant difference between an employee and a subcontractor is their relationship with the employer. Subcontractors have written contracts for every job they do or for a fixed duration. Employees, on the other hand, have a more complicated relationship with long-term contracts, benefits, vacation pay and other such factors.
Is the Classification Important?
This classification is very important because it has an impact on how you file your taxes. Here’s a brief description of your obligations based on whether you’re an employer, employee or a sub-contractor:
• Employer – If you’re an employer to a full-fledged employee, you’ll need to pay the taxes, social security, and insurance on your employee’s behalf. You can deduct the needed amount from your employee’s salary and compensation. You will also have to pay state industrial taxes and federal unemployment taxes and potentially insurance for employees. You don’t have these obligations with a sub-contractor.
• Employee – If you’re an employee, the employer may handle your insurance, but they are responsible for paying your social security and employment tax obligationsng by withhold the amount from your salary. In return, you won’t need to concern yourself about the obligatory payments to the government, but you will take a deduction instead.
• Contractor – If you’re a contractor, you’re responsible for your own taxes, social security, and Medicare payments. However, you’re paid more because the employer doesn’t need to deduct money from your compensation to meet the obligations.
What’s a Difference Between a Contractor and Subcontractor?
Many people become confused about the difference between a contractor and a subcontractor and that’s understandable. A contractor is an entity you contract to perform a job. A subcontractor is an entity that your contractor will hire to perform a portion of the job. For example, if you want to demolish and rebuild a commercial property, you might hire a contractor to handle the task. The contractor might only handle the design and building aspect of the job and hire a subcontractor to handle the demolition and clearing of the site.
As a business owner, you’re just obligated to pay the contract amount and nothing else. If the company you hired engages a subcontractor, you have very little contractual obligation to them as the responsibility falls on the contractor.
Reporting the Earnings
As a business owner, you need to report every employee and sub-contractor you have on hand. You also need to make sure you’re classified them correctly in your contracts and obligations. The IRS is very stringent on the difference between a subcontractor and an employee. If they feel your subcontractor is an employee, you might be forced to pay more than you expected.
Once you’ve clearly distinguished between an employee and subcontractor, and made the individuals involved aware of the circumstances, you can move on to reporting their earnings through the Form 1099-MISC. This is for any miscellaneous payments of $600 or more.
What Should You Keep in Mind?
There are several factors you need to keep in mind when you hire both employees and subcontractors. Here are some factors to keep in mind:
• If you have more control over how your worker’s work, supplies, equipment, training, and you dictate the methodology, the IRS will classify the individual as an employee, even if you consider them a contractor.
• If your employee provides their own equipment and hires workers to complete the job, they’ll be classified as a subcontractor and have more flexibility.
• If you reimburse your worker for job-related expenses like travel, they’ll be considered employees.
• A written contract declaring a worker as a subcontractor might be considered as evidence by the IRS, but they can still be deemed as employees if the circumstances indicate that they are. The facts of the case matter more than the contract.
• You can ask the IRS for assistance in identifying the workers by filling Form SS-8.
It’s a good idea to hire a professional tax lawyer or legal expert if you intend to hire people. They’ll help you determine which step will be ideal for you and step up an employment system what would work for all kinds of professionals. They’ll also explain how the tax system works and ensure you remain in IRS’ good books.