Independent Contractor vs. Subcontractor

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Adopting lean practices, such as outsourcing instead of recruiting additional personnel for specific tasks, has transformed the dynamics of work associations and positions within small enterprises. This practice has fostered a culture of working with independent contractors and subcontractors. While the roles might be similar, understanding the distinctions between "independent contractor" and "subcontractor" is crucial because the minute distinctions become monumental when it comes to their compensation.

This blog will explain the legal distinctions between subcontractor and contractor. Let's get started.

What is an Independent Contractor?

An independent contractor is a person who signs a contract with a person or business to carry out a particular activity or project. A contract detailing the responsibilities, payment, nature, quantity, and other details for the contractor is signed by both sides. The job is the main emphasis of the contract, different from how the contractor does it.

Unlike regular employees who have gone through an organization's hiring and onboarding process, independent contractors are not considered 'employees' for legal purposes. Instead, independent contractors work for multiple clients at once since they are self-employed, also known as a business for self. Hiring independent contractors allows businesses to avoid hiring personnel to cover temporary needs.

Now, let's understand what is a subcontractor before moving on to the independent contractor vs subcontractor.

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What is a Subcontractor?

Subcontractors are typically self-employed, much like independent contractors. However, subcontractors work for the person or organization hired to accomplish the project rather than entering into a direct contract with them to complete a task.

For example, it could imply that a subcontractor is hired to create the visuals for a web application the independent contractor is developing for a business. Subcontractors may be included in a subcontract agreement with the independent contractor and control the details of their work and performance.

A subcontractor is liable for their taxes and is not regarded as an independent contractor or contracting firm employee. Neither the contracting party nor the independent contractor provides them benefits or insurance.

Independent Contractor vs. Subcontractor: Differences

There are subtle differences between a subcontractor and an independent contractor. While both play distinct roles in projects, their relationships, responsibilities, and legal implications diverge significantly. Let's delve into the nuances that set these two terms apart.

PARAMETERS	CONTRACTOR	SUBCONTRACTOR
with Client and Contractor	They are typically hired by the client, have a direct contractual agreement and operate as a separate business entity. They may work independently or hire their workers.	They are hired by a contractor to work on a specific project and may not have a direct contract with the client. Works under the Contractor’s direction and control.
Scope of Work and Specialization	They usually provide specialized services and can work on multiple client projects. They are often highly specialized in particular fields, e.g., graphic design, software development, etc.,	They are often hired for a specific part of a larger project and may not directly interact with the client. They specialize in a specific aspect of a project, e.g., electrical work, roofing, etc.
Structure	They may receive a fixed fee or hourly rate and are responsible for managing their fees and taxes.	They are paid by the contractor upon completing the task and are often paid a portion of the overall project cost.

Independent Contractor vs. Subcontractor: Similarities

When examining the similarities between subcontractors and independent contractors, it's crucial to dissect the nuances of subcontract vs. contract dynamics. Even though these terms play similar functions within projects, understanding how they interact and share characteristics is essential.

PARAMETERS	INDEPENDENT CONTRACTOR AND SUBCONTRACTOR
Contractual Agreement	Both have a formal contractual agreement. Independent contractors define terms, scope, payment, and other details, and subcontractors outline scope, payments, and more.
Independence in Work	Both have a level of independence in their work and can choose how and when to perform tasks. Independent contractors are responsible for their own work methods and tools.
Tax Obligations	Both have tax obligations as self-employed. They are required to manage taxes as per regulations.
Legal and Compliance Responsibilities	Both are subject to legal and compliance norms and can be held liable for any legal non-compliance.

Benefits of a Subcontractor or Independent Contractor

Working as an independent contractor or subcontractor has plenty of benefits, including:

Tax Benefits

Engaging as an independent contractor or subcontractor offers the benefit of receiving your earnings upfront without immediate tax deductions. Once a project wraps up, a specific portion of your income is not withheld by the government. Instead, at the end of each financial year, the responsibility falls upon the contractor to handle the taxes akin to those of a self-employed individual.

The IRS views subcontractors as small business owners. Therefore, depending on their commercial expenses, they may be eligible for tax deductions. This enables you to deduct any other service-related expenses, such as those for supplies, travel, and automobiles. Your immediate revenue potential as an independent contractor or subcontractor may grow as a result of these tax advantages.

Building Your Own Team

As an independent contractor, you can hire subcontractors to carry out particular project duties. With a distinctive group of multiple subcontractors working on the same project, you can ensure that all the requirements are met well within the deadline.

Besides, working with such a diverse group is beneficial because of the multitude of talents and skills.

A Flexible Schedule

Flexibility in determining your work hours stands as an additional benefit when working as an independent contractor or subcontractor. Opting for days and hours that align best with your preferences and your team’s availability becomes feasible, given the absence of a conventional workplace and fixed timetable.

What are the Liabilities of Contractors and Subcontractors?

There are a few liabilities that both contractors and subcontractors will have to consider. The following are some of the most common liabilities that are faced by both contractors and subcontractors.

Legal Liabilities

Contractors: Contractors can be legally liable for breaches of contract, failure to meet project specifications, safety violations, and any harm or damage caused by their work.
Subcontractors: Subcontractors may have legal liabilities for issues related to their specific tasks, quality of work, delays, and contractual obligations.

Financial Liabilities

Contractors: Contractors could face financial liabilities for cost overruns, warranty claims, project delays, and potential legal actions.
Subcontractors: Subcontractors may have financial liabilities for errors, rework, project delays, and contractual penalties.

Operational Liabilities

Contractors: Contractors are responsible for overseeing and carrying out the entire project. This includes organizing everything, setting up schedules, and ensuring that safety regulations are being followed.
Subcontractors: Subcontractors have operational liabilities related to the specific tasks they perform, ensuring quality, meeting deadlines, and complying with safety standards.

Insurance Liabilities

Contractors: Contractors typically need general liability insurance, workers' compensation coverage, and potentially professional liability insurance.
Subcontractors: Subcontractors are often required to carry their own insurance, including liability coverage, workers' compensation, and possibly builder's risk insurance.

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Businesses engaging with contractors and subcontractors stand to gain a valuable advantage through Skuad, an Employer of Record (EOR) platform that facilitates swift hiring, onboarding, and compensation of international contractors. Moreover, Skuad provides support in staying compliant with local tax and employment laws. With Skuad's platform, companies can onboard and pay independent contractors across 160 countries, seamlessly.

FAQs

Does my worker's compensation policy cover independent contractors and subcontractors?

Worker's compensation policies typically cover employees rather than independent contractors and subcontractors. Independent contractors are usually responsible for obtaining their own insurance coverage. However, specific regulations vary by location and circumstances. It's important to consult with your insurance provider or legal expert to ensure proper coverage.

Do I have any legal obligations to my subcontractors and independent contractors?

Yes, you have legal obligations to both subcontractors and independent contractors. While the nature of these obligations can differ, they generally include ensuring a safe working environment, adhering to contract terms, providing timely payment, and complying with relevant labor and tax laws. Properly drafted contracts can help outline these obligations clearly.

Is an independent contractor the same as self-employed?

Yes. Self-employed individuals who do not work as employees but earn a living are known as independent contractors. For instance, a convenience shop owner who also works as a freelance graphic designer is self-employed.

What is an example of a subcontractor?

An example of a subcontractor could be a construction company that a general contractor hires to handle specific tasks within a larger building project. The subcontractor might be responsible for electrical wiring, plumbing, or roofing tasks. They work under the general contractor's umbrella to complete the project's specialized aspects.

Independent Contractor vs. Subcontractor: Everything you need to know

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