One way to grow your professional organizing business, take on more clients and tackle large projects is to hire a team of subcontractors to work collaboratively on group projects. However, when assembling your team of subcontractors, it’s important to understand the difference between an independent contractor and an employee.
Use the information below to protect yourself and your business by ensuring your subcontractors function as independent contractors, not employees. Otherwise, you may find yourself in trouble with the IRS.
What’s the definition of an independent contractor?
According to the IRS, “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
Unlike independent contractors, you must withhold income tax, Social Security and Medicare taxes, and pay unemployment taxes for each employee.
How can I determine if a subcontractor is an employee or an independent contractor?
The IRS uses 3 categories to determine whether an individual is an independent contractor or an employee.
1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Independent contractors are hired as experts to complete a specific project. Whereas an employee would be trained in your business’s systems and procedures, an independent contractor is free to complete the project in any way she sees fit. In other words, you can instruct them on what needs to be done, but you’re limited in how much you can influence how they need to go about it. Also, independent contractors are never subject to regular “reviews” in which you, the supervisor, evaluate their job performance.
2. Financial: Are the business aspects of the worker’s job controlled by the payer?
Any independent contractor you hire should operate as an individual business. He should cover his operating expenses, insure himself or his company independently, and pay for his supplies. In this case, the subcontractor should work for several companies (not just yours) and earn an income from invoicing his clients for completed work rather than receiving a regular paycheck.
3. Type of Relationship: Are there written contracts or employee type benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
The way you conduct business with your organizing subcontractors should be very clear. Independent (or freelance) contractors do not receive typical employee benefits like health insurance and retirement plans. It’s also important that the subcontractor’s work is not a “key aspect” of your business.
What are the consequences of treating an employee as an independent contractor?
If you have no reasonable basis for classifying a subcontractor as an independent contractor rather than an employee, you can be held liable for employee taxes. The IRS and the state in which your business operates can send you a bill for unpaid income tax, FICA and unemployment insurance for the entire period of employment.
Independent Contractor vs. Employee Quiz
Not sure if your subcontractors should be classified as employees or independent contractors? Take the quiz below to find out.
- Are your subcontractors required to participate in a training program?
- Do your subcontractors work specific hours?
- Do any of your subcontractors attend regular team meetings?
- Is your company the only business your subcontractors work for?
- Do you provide office supplies, tools or other equipment for your subcontractors?
If you answered “Yes” to any of the questions above, you may be treating subcontractors as employees rather than independent contractors. To fix the problem, consider reclassifying your subcontractors as employees.
Alternatively, you can change the way you do business with subcontractors to ensure they act as independent contractors hired for specific projects, not long-term employees of your business.
Still have questions? Don’t be afraid to contact the IRS. They’re actually quite friendly and want to help.
Team Management Essentials
It’s difficult to scale your professional organizing business. Some jobs are too big for one person. Or perhaps you’ve had to turn away business because you couldn’t make the deadline. Building a team and hiring subcontractors is the quickest way to expand your client base, take more jobs and increase your income.
For me, the results were amazing. But the best part was working in the company of other like-minded professionals. I’ve created the perfect product to help you build your team. The Team Management Essentials kit includes:
- Communication templates for hiring your team
- A subcontractor screening form
- Printable team and vendor contact worksheets
- Instructions to clearly communicate project logistics
- Team checklists and best practices
- A sample conference call summary
- Client approval forms
Team Management Essentials: Business Forms and Checklist
Assemble the best team of people for your organizing projects with business forms designed to manage any team with confidence.
Word + PDF Download