Contractors Vs Sub-Contractors

Hiring the right people is key to growing a business. For specialized tasks, you may need contractors, independent contractors, or subcontractors. Each role impacts liability, taxes, and business operations differently.

However, their tax status, responsibilities, and employer relationships vary. Many businesses, therefore, consider outsourcing instead of hiring full-time staff to avoid this. 

This blog explains what is a subcontractor, subcontractor vs independent contractor, their benefits, and legal aspects. Let’s begin!

Independent Contractor vs Subcontractor: Understanding the Key Differences

A business or individual hires an independent contractor for a project. On the other hand, a subcontractor is hired by a contractor, not by the main business. Instead of finding clients, they work under a contractor who assigns them tasks.

For example, a company wants a new website. Instead of hiring a full-time developer, it hires an independent contractor. This contractor can then hire subcontractors like graphic designers, web designers, and copywriters to help. This eases the burden on the clients and human resources and accelerates the work with the subcontractors' expertise.

Here is a table highlighting the basic difference between a contractor and a subcontractor.

Introduction to Independent Contractors and Subcontractors

Independent contractors and subcontractors are both self-employed professionals. They play a big role in the construction, marketing, IT, and consulting industries.

An independent contractor is a business or individual hired directly by a client. They can work in any industry or business. A subcontractor specializes in one part of a project and completes their part of the job while following the contractor’s plan.

Who is an Independent Contractor?

An independent contractor is a self-employed person or business hired to complete a specific task or project. They work under a contract but are like freelancers. 

The company that hires them does not withhold these taxes or offer employee protections. Because of this, businesses must classify workers correctly to follow tax and labor laws.

Definition and Characteristics

Independent contractors have full control over their work. They decide how, when, and where to complete tasks, and the hiring company only controls the final result. 

This makes them financially and professionally independent.

Independent contracting is a big part of the gig economy, where workers take on short-term projects instead of full-time jobs. 

These professionals often work with multiple clients simultaneously, increasing their earning potential.

Common Examples of Independent Contractors

Many industries rely on independent contractors, such as:

• Legal professionals: lawyers, consultants, and arbitrators.
• Medical experts: doctors, dentists, and veterinarians.
• Creative professionals: writers, graphic designers, and musicians.
• Tech specialists: software developers, web designers, and IT consultants.
• Skilled trades: plumbers, electricians, and construction workers.‍
• Entertainment industry: actors, voiceover artists, and filmmakers.

Who is a Subcontractor?

A subcontractor is a professional hired by a general contractor to complete a specific part of a project. They do not work directly for the client.

Definition and Characteristics

A subcontractor is a self-employed professional or company paid by the contractor. Subcontracting allows large projects to be broken down into smaller tasks, making work more efficient. 

However, it also comes with risks like delays, compliance issues, and quality control concerns. Because of this, contractors carefully choose subcontractors with proven expertise.

Common Examples of Subcontractors

Subcontracting helps businesses manage workloads, improve efficiency, and access expert skills without hiring full-time staff. Subcontractors exist in many fields. Some subcontractor examples are:

• Construction Trades: Electricians, plumbers, roofers, painters, and HVAC specialists.
• IT Specialists: Cybersecurity experts, cloud engineers, software developers, and data analysts.
• Consulting Experts: Business strategists, tax consultants, and HR advisors hired for specific company needs.‍
• Creative Services: Graphic designers, video editors, and marketing specialists who assist larger agencies.

Key Differences Between Independent Contractors and Subcontractors

Independent contracting and subcontracting are part of self-employment, but the work differs. 

Neither independent contractors nor subcontractors have taxes withheld from their payments. They calculate and pay their taxes, including:

• Social Security
• Medicare
• Federal and state taxes

Independent contractors are paid directly by the company. They may be paid per project or by the hour. To report income, they receive a 1099 tax form.

The contractor pays subcontractors. The terms of their payment, including the price, timeline, and payment method, are set in a contract. Subcontractors may be paid before or after they complete their work.

Employment Relationship

The biggest difference between independent contractors vs subcontractors is how they are hired for a job. An independent contractor is hired directly by a company or client. They set their schedule and control how they complete the job.

A subcontractor, however, is hired by a contractor, not the client. They handle a specific part of the project and report to the contractor. The contractor remains responsible for the entire project, while the subcontractor only completes their assigned task.

Liability and Accountability

Since independent contractors work directly with the client, they are responsible for the project’s success. They must ensure that the work meets the client’s requirements.

Subcontractors, however, are accountable only to the contractor. If something goes wrong with their work, the contractor (not the client) is responsible for fixing it.

Liabilities and Insurance Considerations

Contracting and subcontracting both face risks on every project. Accidents, property damage, or mistakes can lead to lawsuits, financial losses, or project delays. Insurance helps protect against these risks.

Both contractors and subcontractors must clearly define their insurance responsibilities in contracts. This ensures no coverage gaps and that each party knows who is responsible for different risks.

Workers’ Compensation Insurance

Workers’ compensation insurance covers medical costs and lost wages if a worker gets injured.

• Contractors provide this insurance for their employees and, in many states, are responsible for ensuring their subcontractors carry coverage.
• Subcontractors who don’t have employees may not be legally required to carry workers’ compensation, but some states still mandate coverage.

The contractor may be held responsible if a subcontractor does not have workers’ compensation insurance and gets injured. This is why contractors often require subcontractors to show proof of coverage before hiring them.

General Liability and E&O Insurance

Different types of insurance protect against various risks.

• General Liability Insurance: The general liability insurance covers injuries, property damage, or accidents on the job site
  • Contractors usually carry this insurance and may add subcontractors as additional insureds to cover their work.
  • Subcontractors should also have a policy to avoid coverage gaps and protect themselves from claims.

• Professional Liability Insurance: Errors & Omissions (E&O) insurance covers mistakes in work, design errors, or professional negligence.
  • Contractors may need this if they offer consulting or design services.
  • Subcontractors such as architects, engineers, or IT consultants often need this coverage to protect against claims of faulty work or bad advice.

Tax Implications and Responsibilities

Independent contractors and subcontractors do not have taxes withheld from their earnings like employees do. Instead, they must track their income, file tax forms, and pay self-employment taxes.

The IRS treats independent contractors and subcontractors as self-employed, meaning they must report their income correctly and follow tax rules to avoid penalties. They also determine a worker’s classification based on:

• Behavioral control 
• Financial control 
• Relationship

Self-Employment Taxes

The independent contractor self-employment tax includes:

• 12.4% for Social Security (on income up to USD 168,600 for 2023)
• 2.9% for Medicare (on all income)
• An extra 0.9% Medicare tax on income above certain limits

Independent contractors and subcontractors must file taxes quarterly using Form 1040-ES. If a client pays an independent contractor more than USD 600, the client must issue them a Form 1099-NEC (previously 1099-MISC). This form reports the income paid to the contractor, who must include it on their tax return.

However, the IRS requires backup withholding if a contractor provides the wrong taxpayer identification number or misreports income. This means the hiring company will withhold a portion of future tax payments.

Deductible Business Expenses

Both independent contractors and subcontractors can reduce their taxable income by deducting business expenses. Some common deductions include:

• Office expenses: Rent, internet, phone bills, and supplies
• Travel costs: Business-related mileage, airfare, and lodging
• Equipment and tools: Laptops, software, and work-related tools
• Professional fees: Business licenses, insurance, and legal fees‍
• Marketing and advertising: Website costs, ads, and branding

Hiring and Managing Contractors vs Subcontractors

Managing and hiring independent contractors vs subcontractors requires clear agreements, proper planning, and strong communication. Businesses must ensure legal and tax compliance, set clear expectations, and track performance to avoid conflicts.

Contractual Agreements

A solid contractor and subcontractor agreement protects both parties and prevents misunderstandings. It should include:

Best Practices for Management

Well-managed contracting and subcontracting can be valuable assets to any project. The best practices for this would be:

• Engage subcontractors during project planning. They can suggest better timelines, improve quality, and help prevent delays.
• Define a clear payment schedule based on milestones or project phases.
• Introduce contractors and subcontractors to your team, as well as tools and processes. 
• Before starting work, have the contractor sign off on the project plan and deadlines. To avoid project delays, build a small buffer into deadlines until you know the contractor’s reliability.
• Define who is responsible for what using a RACI chart. To avoid confusion, assign contractors a main point of contact.

Common Misconceptions and Legal Considerations

Many businesses misclassify workers without realizing the risks, leading to fines, legal trouble, and tax issues. You must understand worker classification rules and follow IRS guidelines to avoid this.

Misclassification Risks

Misclassifying an independent worker means treating an employee as an independent contractor. Such common misconceptions are:

• Even if a worker wants to be an independent contractor, that does not mean they are one. The law decides how a worker is classified, not personal preference.

• IRS audits can affect any business, regardless of size. Small businesses can apply for the Voluntary Classification Settlement Program (VCSP) to correct past mistakes.

• Independent contractors should have an Employer Identification Number (EIN) and pay their taxes.

Ensuring Compliance with IRS Guidelines

To follow IRS rules, you can:

• Use clear contracts that align with actual job duties.
• Pay contractors per project instead of hourly or weekly wages.
• Do not reimburse expenses.
• Keep records of how workers are classified and why.

Benefits of Understanding the Difference

Correctly classifying independent contractors vs subcontractors helps businesses save money, avoid legal trouble, and improve efficiency. It also makes project management smoother and helps companies stay competitive.

Here’s a breakdown of why this matters:

Financial Efficiency

Enhanced Project Management

Future Trends in Contracting and Subcontracting

The world of independent contracting and subcontracting is changing fast. New technology, laws, and work trends shape how businesses hire and manage contractors.

Impact of Gig Economy

The gig economy is a flexible digital economy where temporary, freelance, or contract jobs are common, often facilitated virtually. More people now prefer contract work over full-time jobs. This trend means there will be: 

• More skilled contractors
• On-demand hiring
• Remote work expansion
• Freelance platforms

Regulatory Changes

Governments are introducing stricter rules to protect independent workers and prevent misclassification.

• Some laws may require businesses to give benefits to long-term contractors.
• Companies must prove contractors are truly independent to avoid fines.
• Governments are tightening tax rules on contractor payments.

How Skuad Helps

Understanding the difference between independent contractors vs subcontractors is key to avoiding legal issues and saving costs. Proper classification ensures better compliance, financial efficiency, and project success.

Skuad makes hiring, paying, and managing global talent easy. Whether you need full-time employees or international contractors, Skuad handles contracts, payroll, and compliance in different countries. It ensures workers are classified correctly, preventing fines and legal risks. 

With Skuad, businesses can focus on growth while managing talent hassle-free. Stay compliant, pay on time, and scale your team with ease. 

‍Book a free demo now and simplify global hiring with Skuad.

FAQs

Is there a difference between a subcontractor and an independent contractor?

Yes, an independent contractor works directly for a client, while an independent contractor hires a subcontractor to complete part of a project. 

Are 1099 employees considered subcontractors?

No. Receiving a 1099 form indicates that someone is an independent contractor or subcontractor. However, it does not specify which role or as a subcontractor 1099. 

Do subcontractors need a license?

Yes. Subcontractors require a license that aligns with the laws and regulations.

Who makes more money, the contractor or subcontractor?

Earnings vary depending on the industry, project scope, and individual agreements. There is no fixed rule regarding who earns more.

What classifies someone as a subcontractor?

A subcontracting independent contractor hires a contractor to complete specific tasks within a larger project.

Can a subcontractor hire another subcontractor?

Yes, a subcontractor can further hire other individuals to perform the tasks. However, an approval must be obtained from the primary contractor.