You might be asking yourself what’s the difference between a contractor and an employee? The difference is that a contractor is self-employed and typically works on a job-by-job-basis. An employee works for a single company.
Contractors are responsible for their own benefits, taxes, insurance, retirement and other aspects of running a business. A company withholds taxes and pays all or a portion of benefits for its full-time workers.
There is also a difference between subcontractor and independent contractor.
Difference Between Contractor and Subcontractor
Contractors hire subcontractors if they need a specialist in a particular area. Let’s say a contractor builds a 37 story skyscraper in a new industrial complex – they might hire one or more subcontractors. Hiring an electricical contractor can ensure the building’s wiring is properly and professionally installed.
Working as a subcontractor generally requires you to sign a subcontractor contract with the general contractor in charge of the project. Subcontractors provide more niche services and specialize in fields like plumbing, electrical, work, painting, and drywall installation.
Subcontractors work closely with contractors to make sure their portion of the job is completed on time and to the client’s satisfaction.
General vs Independent Contractors
The last order of business we’ll tackle in this section is general and independent contractors.
A general contractor may hire an independent contractor, which is the same as a subcontractor. The two share a meaning.
There are legal differences between contractors, subcontractors, and employees of a company or organization. Two of the most important differences are taxes and benefits, which all contractors must pay.
Contractors, unlike employees, do not have taxes withheld from weekly or monthly earnings. Social Security, Medicare and any other aspects of being an independent contractor must also be handled by the contractor themselves rather than a payroll or accounting department at a company.
This regulation applies to both contractors and subcontractors.
There are other elements to consider, such as insurance coverage requirements, tax/employment status, and your risk of liability as a contractor or subcontractor.
Insurance requirements can get tricky, so it’s best to check if the industry you work in requires you to have liability insurance, and if so, whether you need general liability, professional liability, or something else altogether. Some industries require coverage, and others do not.
It all depends on the value of your business and the kind of work you do.
Commercial general liability insurance is usually required before diving into the deep end of the workforce. If anything were to happen that causes damage to your property, or if someone gets injured and blames you for it, you need to have commercial general liability insurance.
Work completed by subcontractors is also often covered by general liability insurance, as well as medical payments that come as a result of accidents, bodily damage, personal injury, and advertising.
Workers’ compensation is usually required in the construction industry because of the high risk of physical injury. If you use a company or personal vehicle to transport yourself or work supplies, you must have commercial auto insurance.
Another key component of coverage for contractors that’s sometimes required is a surety bond. A surety bond is a bit different from traditional insurance. Surety bonds cover the cost of finding a replacement if you win the bid for a contract but have to back out.
Contractors are not generally required to have professional liability insurance, but for many contractors, its a good idea to consider. Professional liability insurance protects your business in cases of a human error. There are insurance policies that cover pretty much everything under the sun – if someone slips and falls at your place of business, or in cases where a liability claim is filed, for example.
There’s even coverage that kicks in when equipment/tools become lost, stolen, or damaged!
Although contractors are not usually required to protect their tools and equipment, this coverage can more than come in handy. As a general rule of thumb, it’s a good idea to protect your business assets, whether they are your own knowledge and skills or an expensive truck or toolset.
You can also look at contractor’s insurance, which provides a range of advantages, especially if bodily injury occurs, personal injury, property damage, and on jobs completed by subcontractors.
Taxes are another part of the contractor/subcontractor set of responsibilities. Unlike being a full-time employee of a company, as a contractor or subcontractor, you are responsible for fees such as income tax. You may also know it as ‘self-employment tax’. Contractors and subcontractors are required to pay into Social Security, health insurance and unemployment tax.
Some are really good at managing all of the moving parts like taxes and general administration work while balancing a full workload of clients. Others cannot. In this instance, you can hire a subcontractor to assist with accounting, bookkeeping, general business management, invoicing, payments and more.
A subcontractor receives a portion of what the contractor earns for an overall job. Contractors receive payment per job or by the hour. As a contractor, you a receive 1099 form, and the IRS determines if a worker is a contractor or an employee. You should also fill out an SS-8 form for federal employment and income tax withholding purposes.
As a contractor or subcontractor, know that you are liable for anything that might occur on the job. In workers’ compensation claims, 49 states are in agreement that general contractors are responsible for injuries that happen to employees of uninsured subcontractors.
This cuts down on performing work tasks you don’t want to do, just so you can pay the bills.
You have the flexibility and freedom of being your own boss while working within the terms of agreements made with contractors. In many cases, this means working remotely and at the hours that are most convenient for you.
Contractors and subcontractors only pay taxes once annually. You can also deduct business-related expenses like internet service, rent for an office, cell phone service and more.
All in all, there are countless inherent benefits to working for yourself.
If you are thinking of how to become a subcontractor, you’ll need to acquire some skills and certifications along the way, depending on the subcontracting field you want to work in.
Until then, work on getting the certifications you want, and finding your first gig will be one step closer to reality.