Payroll for Subcontractors

Payroll For Subcontractors

Employers who choose to work with subcontractors or independent contractors instead of employees should prepare to handle payroll and taxes in a different way than they would an employee. While there are some advantages to using subcontractors instead of employees, there are a few things that an employer should pay very close attention to.

What is a Subcontractor?

Like an employee, a subcontractor is either an individual or group that one hires to complete a specified task for a business. They are different from an employee. There is no obligation for the employer to continue to use the subcontractor after the task completes. They are not contractually bound to continue to use the subcontractor in the same way they would a regular employee.

Advantages of Using a Subcontractor

There are some distinct advantages with the payroll for subcontractors such as much less paperwork, less tax withholding, less record keeping, and better budget control for the employer. Subcontractors are responsible for supplying their own tools and equipment to complete a job and it is not a requirement for employers to provide formal training regarding the job. In many cases, using a subcontractor allows an employer to better dictate the speed at which the job completes. Employers are also able to use subcontractors based on their specific ability and skill set.

Difference Between Employee and Subcontractor

The IRS sets the criterion that differentiates an employee from a subcontractor and business owners should be very careful when following this criterion. You cannot treat subcontractors the same as employees. This includes things such as working on the premises of the business, receiving formal training or having to pay for business expenses. When this criteria is not met, the IRS may consider a person an employee instead of a subcontractor. This means the employer loses all of the advantages of using a subcontractor.

Paying a Subcontractor

In most cases, an employer or business owner will negotiate the terms of a contract with a subcontractor, including the pay before the subcontractor begins the work. Once a contract is in agreement, you typically pay the subcontractor and the work ensues. Again, because the subcontractor is not an employee, taxes are not withheld. Neither are expenses such as insurance, or workman’s comp.

Keeping Records as a Subcontractor

The burden of taxes and withholdings lifts from employers of subcontractors. However, the subcontractor himself or herself must prepare to handle taxes on their own. They should have a strategy in place that helps them to keep track of the taxes they owe as they go along so as to avoid a huge tax burden at the end of the year.

Related: The Top 5 Mistakes Contractors Make When Doing Their Own Taxes

Have More Questions About Payroll For Subcontractors?

We can help both employers who use subcontractors as well as subcontractors themselves. We want to make sure they are handling their payroll correctly. Contact us today with any questions you might have at (602) 375-5251.

Chris Hacker
Chris has been working in the bookkeeping and accounting field for over 15 years preparing business, income and payroll taxes. Chris has a bachelor’s degree from Arizona State and is an Enrolled Agent with the Internal Revenue Service.