Understanding the Difference Between Subcontractors and Employees

As a construction business owner, determining whether to classify a worker as a subcontractor
or an employee impacts your taxes, legal obligations, and the overall structure of your business.
Misclassification can result in penalties, so it is important to understand the key differences.

Subcontractors

A subcontractor is an independent contractor who provides specialized services under a
contract. Subcontractors typically:

• Work for multiple clients rather than exclusively for your company
• Control how, when, and where they perform their work
• Supply their own tools, equipment, and materials
• Handle their own business expenses and pay self-employment taxes

From an accounting perspective, you’re not responsible for withholding income taxes, Social
Security, or Medicare for subcontractors. Instead, you’ll issue them a Form 1099-NEC for
payments of $600 or more in a year. For more details, please visit our blog by clicking here.

Employees

An employee works under your direction and control, meaning you dictate how, when, and
where the work is performed. Employees typically:

• Work exclusively for your business
• Use tools, equipment, and materials you provide
• Receive consistent paychecks and benefits like health insurance or paid time off
• Have their income taxes, Social Security, and Medicare withheld by your company

For employees, you’ll issue a Form W-2 at year-end, and you’re responsible for paying payroll
taxes and providing workers’ compensation insurance.

Key Factors to Consider

The IRS uses three main categories to determine worker classification:

1. Behavioral Control – Do you control or have the right to control what the worker does
   and how they do their job?
2. Financial Control – Do you control the business aspects of the worker’s job, such as
   payment methods and reimbursement of expenses?
3. Relationship Type – Are there written contracts, employee benefits, or an expectation
   of permanence?

Why It Matters

Classifying workers correctly can protect your business from audits, fines, and legal challenges.
Misclassification can lead to:

• Back taxes and penalties for failing to withhold income and payroll taxes
• Liability for unpaid overtime and benefits
• Increased scrutiny from the IRS and state agencies

Reach Out for Assistance

Determining the right classification for workers can be complex and often confusing. Whether
you need guidance on worker classification or assistance with payroll and tax compliance, we
can help you with information and resources to support your success.