The Internal Revenue Service has specific requirements that identify a subcontractor as opposed to an employee. This distinction is important for business owners, especially when they prepare their business taxes on an annual or quarterly basis. While there is not a single list offered by the IRS that defines a subcontractor, the IRS does offer situations or characteristics that can indicate that a single person is a subcontractor and not an employee.
As of May 2011, the IRS identifies a subcontractor as a person who is responsible for completing his own taxes by gathering invoices and receipts from clients and calculating the total figure that he must pay to the state and IRS. However, if the worker gets a paycheck from an employer where the taxes have already been subtracted and paid, the worker is considered an employee instead of a subcontractor.
The IRS also defines a subcontractor based on the amount of control the worker has over the work being completed. The IRS defines the control in situational categories. One control is the behavior of the worker in terms of direction, management and instructions. While an employee is given instructions by an employer, the subcontractor is often responsible for the direction and management. Similarly, the subcontractor has control over the budget allotted by the company for a project.
On Site vs. Off Site
Employees often work on site in an office provided by the employer. A subcontractor will often work off site and have an office in his home or a rented office in a third location. The IRS identifies subcontractors as individuals who most likely work from home, their own personal offices or who only occasionally visit the office for meetings with the employer. Someone who comes into the office and stays until the work has been completed, only to return the following day, is considered an employee.
A subcontractor is responsible for hiring her own assistants for a given job or project, even if it is for a project for a business with existing employees. If a worker is hired by a company and expected to fill a role or position, she is considered an employee according to the IRS.
Discharging the Worker
Another example of a subcontractor definition is the discharging methods of a subcontractor compared with an employee. An employee can quit a job at any given time, and a business can discharge an employee at any given time. A subcontractor, however, may be bound by a contract and can be held liable for failure to uphold a subcontractor contract if he breaks the contract.