Accounting and Finance Foundations

Unit 8

Accounting and Finance Foundations Unit 8: Payroll 681

Payroll

Chapter 2Chapter 20

Student Guide

Subcontracted WorkersLesson 20.6

According to the IRS, if a company hires employees, the company is responsible for withholding and pay-

ing the employment-related taxes. However, if the company hires a subcontractor, the subcontractor is

responsible for keeping his/her own records and paying his/her own income and self-employment taxes.

To determine if you are an employee or a subcontractor, consider the following:

n    Behavioral control – Do you have the right to direct and control how the work is done?

n    Financial control – Do you have the right to direct and control the financial aspects of the work?

n    Relationship of the parties – Do you have a written contract and/or employee benefits?

These questions help determine whether you are a subcontractor or an employee, but no single factor

provides the answer.

So, let’s look at behavioral control. If you are provided detailed instructions by the company on how the

work is to be done or you are trained by the company to perform the tasks in a certain way, you may be

considered an employee. A subcontractor does not need or receive detailed instructions on how the work

should be done. The IRS gives a few examples of instructions the might be given to an employee:

n    How, when, or where you do the work

n    What tools or equipment you are required to use

n    What assistants you may hire to help with the work

n    Where you may purchase materials and services

Now let’s look at category two – financial control. The simple way to view this question is to ask yourself,

“Does my work require me to spend money out of pocket for supplies and expenses?” If your employer

does not reimburse you for these expenses, then you may be considered a subcontractor.

Let’s look at the remaining category – relationship of parties. First, determine if the company provides

you benefits such as paid vacation, sick days, health insurance, or a pension. If they are providing you full

benefits, you may be considered an employee.

The IRS states that a contract may designate you as a subcontractor; however, if you and the company are

not acting in the terms of the contract, this may not be evidence for determining your status as a subcon-

tractor.

If the company and you both form an agreement that you are a subcontracted worker by reviewing the

three categories together, you will be required to complete a W-9 form. The W-9 form provides the com-

pany with the information to send you a 1099 – Miscellaneous Form at the end of the year.

Form 1099 - Miscellaneous is sent to individuals at the end of year for any payments received as a subcon-

tractor of $600 or more. The payments include fees, commissions, and/or monies received for services

performed as a nonemployee.

As a subcontracted employee, you would be required to pay the required federal tax, Social Security tax,

and Medicare tax, along with any applicable state, local, and/or other tax requirements.