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By Tina Moe, CPA


f you’re looking to hire someone in your

business but you’re not sure whether to label

them as a subcontractor or an employee,

you need to understand the difference between

the two as it pertains to both tax law and

unemployment insurance regulations.

A subcontractor is self-employed and pays their

own taxes and insurance. I always advise my

clients to obtain a completed form W-9, a copy

of their insurance certificate with a worker’s

compensation rider and if possible, a written

contract outlining the services being provided

and the understanding of both parties involved.

On the other side, an employee has taxes

withheld and you, the employer, pay taxes

on their behalf. In fact, you pay ½ of their

Social Security and Medicare taxes where the

subcontractor pays it all. The employer also

pays both federal and state unemployment

tax on their wages as well as worker’s comp

insurance. Employees fill out forms like W-4,

I-9, and other documents which determine

their withholding preferences and eligibility to

work in the US.

There are several common law rules that help to

determine this answer and they can be broken

down into three categories.

The first category to consider is behavioral

control. Do you control how and when the

work is completed? Do you conduct training

to ensure that it’s done in the manner and

timeliness that you’re looking for? How much

control do you have over work scene? Are you

overseeing the work and giving directives on

tasks and quality? Typically, subcontractors

manage their own work, hours of work and

methods to which the work is performed.

The second category you should consider is

financial control. Do you control the financial

aspects of the work to be conducted? In other

words, do you make the decisions regarding

equipment investments, material costs and

other costs associated with conducting the

work? Do you reimburse your worker for those

expenses? If you’re reimbursing someone or

you’re controlling the costs, more than likely

you have an employee-employer situation.

The third category is the perceived relationship

between you and your worker and how you both

view the situation. Does your worker consider

themselves an employee or a subcontractor?

Do they work for other people providing the

same services or are they working exclusively

for you?




How to

Determine the





| JUNE 2015 |

Core Business Strategies