Can I Treat Someone as a Subcontractor Instead of an Employee?

Can I treat someone as a subcontractor instead of an employee?  This is a top 10 question we get asked.  We understand why some business owners would like to classify someone they “hired” as a subcontractor.  Several of the reasons we have heard over the years are:

  • If the person isn’t a good fit, it’s easy to fire them. 
  • I don’t want to pay payroll taxes. 
  • They don’t work full-time or only work at certain times of the year.
  • There is less paperwork.  
  • I don’t want to deal with payroll and all the issues with employees.
  • They are in school.

The reality is that none of these reasons are valid when determining if you are adding a subcontractor or employee to your business. 

What does matter are several relationship factors to determine if you have a subcontractor or an employee. The IRS has what is often called a “right to control test” which are 20 factors used to determine if someone is a subcontractor or employee.  This “test” falls into three broad categories.

  • Behavioral control
  • Financial control
  • Type of relationship

As an employer, it is crucial to understand your working relationship with a worker because if you don’t there are serious tax and penalty consequences for misclassifying workers. Some of the common consequences are:

  • Tax penalties
  • Unemployment insurance penalties
  • Workers compensation penalties
  • Overtime and minimum wage violations
  • Legal action and lawsuits
  • Government audit and investigation
  • Reclassification and payment of back taxes

To avoid the consequences above, use The 20 factors below that the IRS uses to determine who controls the how, when and where work is performed. It is important to note that no single factor is determinative, and the entire working relationship must be considered.

  1. Level of instruction. If the company directs when, where, and how work is done, this control indicates an employer-employee relationship. 
  1. Amount of training. Requesting or requiring workers to undergo company-provided training suggests an employment relationship since the company is directing the methods by which a worker performs their duties. 
  1. Degree of business integration. Workers whose services are central to the business operations or significantly affect business outcomes are likely to be considered employees. 
  1. Extent of personal services. Companies that insist or demand that a particular person perform the work have asserted a high degree of control, which indicates an employment relationship. In contrast, independent contractors are typically free to assign work to anyone. 
  1. Control of assistants. If a company hires, supervises, and pays a worker’s assistants, this control suggests an employment relationship. If the worker gets to control the hiring, supervising, and paying of assistants, they could be defined as an independent contractor. 
  1. Continuity of relationship. A continuous relationship between a company and a worker indicates an employment relationship. However, an independent contractor arrangement can also be an ongoing relationship that spans multiple, sequential projects. 
  1. Flexibility of schedule. If a company gets to dictate a worker’s days and hours of work, this degree of control suggests an employer-employee relationship. 
  1. Demands for full-time work. Workers who work full-time hours suggest a company has control over most of their time, which indicates an employment relationship. 
  1. Need for on-site services. Requiring someone to work on company premises —  particularly if the work could be performed elsewhere — suggests an employer-employee relationship. 
  1. Sequence of work. If a company requires work to be performed in a specific order or sequence, this type of control suggests an employment relationship. 
  1. Requirements for reports. If a worker has to regularly provide written or oral reports on project status, they could be viewed as an employee. 
  1. Method of payment. If a worker is paid hourly, weekly, or monthly, this could suggest an employment relationship, unless the payments simply are a convenient way of distributing a lump-sum fee. It is more characteristic to pay contractors upon project completion or commission.
  1. Repayment of business or travel expenses. Independent contractors are typically responsible for paying for travel or business expenses, and most contractors set their fees high enough to cover these costs. In contrast, reimbursement of travel and other business expenses by a company suggests an employment relationship. 
  1. Provision of tools and materials. Workers who use company-provided equipment, tools, and materials to perform their work are more likely to be considered employees. Work largely done using independently obtained supplies or tools supports an independent contractor classification. 
  1. Investment in facilities. While independent contractors and freelancers usually pay for their own work facilities, most employees rely on their employers to provide work facilities. 
  1. Realization of profit or loss. If a worker’s earnings are predetermined and have little chance to realize significant profit or loss through their work, they are generally considered to be an employee. 
  1. Work for multiple companies. Workers who provide services for multiple companies concurrently are likely to qualify as independent contractors. 
  1. Availability to the public. If a worker regularly makes services available to the general public, they could qualify as an independent contractor. 
  1. Control over discharge. If a company has the unilateral right to discharge a worker, this suggests an employment relationship. In contrast, a company’s ability to end an independent contractor relationship generally depends on the terms specified in the contract. 
  1. Right of termination. Most employees can terminate their work for a company unilaterally without liability. Independent contractors cannot quit their work engagements without liability, except as permitted under their contracts.

We encourage business owners to carefully evaluate their relationship with team members.  If you are unsure about a working relationship classification seek professional advice from your CPA.

For some tax-saving tips, check out our report on  5 Tax Saving Strategies to Start Today!

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