Employee vs. Subcontractor: What’s the Difference and Why It Matters
If you’re running a business or starting your freelance journey, it’s crucial to understand the difference between an employee and a subcontractor—not just for compliance, but for tax purposes, legal responsibilities, and how you structure working relationships.
What Is an Employee?
An employee is someone who works directly for a company and is subject to that company’s control when it comes to what tasks they perform, how they do them, and when and where they work. Employers are legally required to:
Withhold income taxes
Pay Social Security and Medicare taxes
Provide unemployment insurance (in most cases)
Possibly offer benefits like health insurance, paid time off, or retirement plans
Employees typically:
Use company-provided tools or equipment
Follow a set schedule
Have a long-term or ongoing relationship with the company
Receive training or direction on how to do the job
What Is a Subcontractor (1099 Worker)?
A subcontractor—also known as an independent contractor—is a self-employed individual or business hired to perform specific work or services. They receive a Form 1099-NEC if they’re paid $600 or more in a year, and they are responsible for:
Paying their own taxes (including self-employment tax)
Providing their own tools, equipment, and workspaces
Managing their own schedules and methods of completing the work
Handling their own insurance and benefits
Subcontractors typically:
Have multiple clients
Work under a contract for a defined scope and timeline
Operate independently with minimal supervision
Are not entitled to employee benefits or protections
Why the Distinction Matters
Misclassifying a worker can lead to serious consequences, including fines, back taxes, and legal action. The IRS and Department of Labor closely monitor classifications, and using the wrong one—intentionally or not—can hurt your business.
To help determine the correct classification, the IRS uses a “common law test” based on three main areas:
Behavioral Control – Does the company control how the worker does the job?
Financial Control – Does the company control the business aspects of the worker’s job?
Type of Relationship – Are there benefits, contracts, or an expectation of permanence?
Final Thoughts
When in doubt, it's smart to consult with a professional. Setting up your workforce properly from the start saves time, money, and stress down the road. Whether you're hiring help or offering your services, knowing the difference between an employee and a subcontractor keeps everyone on the right track.
