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Employee vs. Subcontractor– What’s the Difference?
In any given industry, business owners always need people to assist them in accomplishing their company’s operations. Your terms regarding your relationship with the people that you hire will help you determine whether they are your employees who are associated with your business in many ways or your subcontractors who are operators who are independently responsible for their own bookkeeping and taxes. It is important that your relationship with the people who work for you is clearly determined as it has implications for tax liabilities. It also dictates your responsibilities, obligations, and commitment to said workers.
Here are some things you need to know about subcontractors and employees.
When you do a business transaction, you provide either a service or a product in exchange for a certain amount of money. You serve as the contractor. If you hire another person or team to perform some of the tasks or provide the products you promised to deliver, you create a contract within an existing contract or a subcontract.
Work arrangements that cover when to treat a person as a contractor/subcontractor and when to treat him or her as an employee are a bit complex. There are just general guidelines instead of rules. Basically, if the person you hired makes autonomous decisions about how he or she will perform the work you require then he or she is considered a subcontractor. On the other hand, if you dictate the specifics of how the job should be done, he or she is an employee.
The status of a worker as an employee depends on three main criteria for determining the extent of control that he or she has over his or her work – behavioural criterion, financial criterion, and relationship criterion.
The behavioural criterion is about how the work is performed. The financial criterion is about who has control over the financial resources needed to perform the job. Lastly, the relationship criterion determines whether a worker falls into the category of employee or a subcontractor.
A more complex relationship exists between an employer and an employee compared to a contractor and subcontractor. For one, employees get to enjoy additional perks that include health insurance and other incentives.
Like we have mentioned above, it is important that you clearly determine whether you hire employees or get the services of subcontractors because of the tax implications. Employers pay for the Pension Plans of their employees while subcontractors have to take care of that themselves. Employers also pay taxes for their employees.
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