The IRS takes a keen interest in the difference between an employee and a subcontractor, since a company does not withhold income tax, social security or Medicare when they hire subcontractors. Business owners, employees and subcontractors all so need to understand the distinction so that they can be sure they are treated fairly.
The IRS has devised a set of Common Law Rules for determining who is an employee and who is a subcontractor, based on the behavioral, financial and over-all relationship between the company and the employee or subcontractor.
An employer retains the right to control the behavior of an employee, including where, when and with whom to work, and also what supplies and services are purchased and from whom. The employee may be given latitude as part of his job responsibilities.
Subcontractors set their own work hours, independently contract for supplies and services, and are not directly supervised by the client.
Employees receive a regular pay check based on time worked and do not generally have significant unreimbursed business expenses.
Subcontractors are paid based on the completion the the job, and have a significant investment in business facilities and equipment, as well as overhead business expenses not charged directly to the client.
An employee usually works for one employer and often receives benefits like insurance, pension, vacation and sick pay in addition to regular wages.
A subcontractors runs his own businesses and has more than one client. The official relationship with the client is not permanent and ends with the completion of the job.