Payroll: What’s the Difference Between Contractors and Subcontractors?

Have you thought about hiring someone to do the marketing, human resources, or payroll for your small business? Are you confused about how the relationship works between contractors and subcontractors and your business? Do you wonder how these arrangements may affect your payroll? Many times the terms – contractor and subcontractor – are used interchangeably; however, key differences do exist between the two roles. Therefore, The Payroll Department would like to clarify these terms and explain how they relate to your business’s payroll.

What Is a Contractor?

You may outsource to a contractor, but the contractor could be sub-contracting tasks to others. You only have to worry about paying and issuing a 1099 to the contractor.A contractor is the person or company that you contract with to do a set of skills. Then, typically, once the work is completed, you pay them for the completed tasks.

The contractor is a business owner themselves. Their business is to provide certain skills for another business who doesn’t have the expertise or time to do those skills themselves. For example, you may contract with a company to have them do your company’s marketing and advertising, including strategy, website design, ad creation, blogging, and social media.

The contractor works for themselves. They’re not your employee. You negotiate a price for the completion of the work that needs to be done, and you both sign a contract that outlines the work that will be completed within a specific timeframe for a certain cost. The contractor determines how the task(s) will be completed and how they will allocate their time to complete the work.

What Is a Subcontractor?

A subcontractor is also a type of contractor. They are a business owner, too. They provide certain skills that they perform for customers. However, the contractor is their customer – not you. You are the contractor’s customer.

Think of the contractor as the big picture guy, overseeing multiple aspects of a job – even if they’re completing some of the tasks themselves. The contractor may hire a subcontractor to perform a specific task they may not have the skill set to perform within the responsibilities you hired the contractor to complete. The subcontractor signs a contract with the contractor – not you – to perform this work.

For example, let’s say you hired a company to perform marketing work for you. The contractor is responsible for the overall completion of a broad range of tasks they are to provide for you, like marketing strategy, website design, blogging, social media, etc. However, the contractor may hire another company – a subcontractor – to complete one aspect of your marketing, such as your website design, because the contractor doesn’t have experience in building websites. The subcontractor – the website designer – is only responsible for designing and building your website – nothing else related to your overall project with the contractor.

Typically, a subcontractor only interacts with the contractor – not you. However, depending upon the job required, the subcontractor may meet with you to gain a better understanding about your company and the task they’ve been hired by the contractor to do. For example, the subcontracted website designer may meet with you to discuss how you want your website set up and to show you page designs once completed. However, once the job is completed, the contractor pays the subcontractor for their work – not you.

How Do Contractors and Subcontractors Affect Your Payroll?

 Contractors and subcontractors don’t affect your payroll, because they’re not employees. When you negotiate a job with the contractor, generally, you agree to pay them a flat fee – not a salary or hourly rate. (However, in some cases like hiring a law firm, you may pay the contractor an hourly rate.)

Since you contracted the main job through the contractor, you pay the contractor through your accounts payable system – and not your payroll. The contractor, in turn, pays the subcontractor for his work.

When it comes to tax obligations, both the contractor and the subcontractor are responsible for paying their own taxes. Typically, you would provide the contractor with a IRS Form 1099 for the work they did for you. The contractor would provide the subcontractor with a IRS Form 1099 for the work the subcontractor did for the contractor.

Additionally, unlike employees, you don’t provide or pay for any benefits for the contractor or subcontractor like health insurance, sick time, or vacation time. The contractor and subcontractor are responsible for their own benefits.

Do You Need Someone to Do Your Payroll for You?

Understanding the role of contractors and subcontractors and how they relate to your payroll can be confusing – as well as other aspects pertaining to your company’s payroll. If you’re not knowledgeable in payroll procedures and the current laws pertaining to payroll and taxes – and what small business owner really is? – you should consider contracting with someone who is, like The Payroll Department.

With over 25 years’ experience in payroll, Teresa Ray can help you feel confident that your company’s payroll and tax and regulatory issues are being handled correctly. Like issuing W-2s and 1099s appropriately at the end of the year. At The Payroll Department, we’ll pay attention to all the details pertaining to your payroll, so you can spend your time – as you should – doing what you do best.

To learn more about how contracting The Payroll Department can benefit your business, contact us at 317-852-2568.


– Ariane of The Payroll Department blog team

Posted in: Payroll, Payroll Processing

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