Deciding if someone is a subcontractor or employee is an issue we deal with all the time, especially at workers comp audit time. By calling someone a subcontractor, a business avoids paying unemployment, social security and medicare taxes. The IRS definition to determine an employee or subcontractor is based on 3 principles:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
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?
Most people don’t realize that in some cases, insurance companies have the right to charge workers comp premium $$$ for work performed on your behalf by a subcontractor. The insurance company treats them as an employee. To avoid getting nailed at audit time, proper documentation and record keeping is essential.
How do you manage your subs? Do you have a subcontractor agreement in place? How is your record keeping?
Insurance Black Belt