In a legal sense there's no real difference between an independent contractor and a subcontractor. Each class of worker has the same tax-paying requirements and enjoys the same benefits. The differences arise primarily from who is in charge on a given work project. An independent contractor may be a subcontractor on one job and in charge on the next.
Independent Contractor Definition
An independent contractor is a self-employed worker. The contractor is not an employee and does not enjoy several of the working benefits an employee receives, including worker's compensation benefits and the use of employer equipment. An independent contractor gains other benefits, including the ability to work with anyone he chooses and the ability to negotiate the parameters of a given job including working hours, pay and the conditions for satisfactorily completing the assignment. An independent contractor must pay his own taxes by making quarterly estimated tax payments to the IRS and by filing IRS Form 1099 at the end of the year.
A subcontractor is an independent contractor in all legal respects including tax obligations. An independent contractor becomes a subcontractor when she accepts a job working for another independent contractor who has a larger contract to complete a project. This is seen most often in a public works project swhere an independent contractor wins a bid to perform road improvements or remove trees. The independent contractor may farm part of the work out to a subcontractor for a variety of reasons, including the specialty or expertise of the subcontractor.
Chain of Responsibility
The subcontractor answers to the independent contractor in charge of the larger project. A subcontractor usually has no direct contact with the client. The independent contractor in charge of the larger project is responsible for communicating all project parameters to the subcontractor and is ultimately responsible for the subcontractor's work on the project. The independent contractor in charge may suffer a financial penalty under the terms of her contract if the subcontractor's work is unsatisfactory.
Permission to Subcontract
A general contractor in charge of a project must usually acquire the client's permission to use a subcontractor. Employing a subcontractor without a client's permission may cause liability issues for the independent contractor in charge, especially if the subcontractor does a terrible job on the assignment. An independent contractor may be in breach of contract for using a subcontractor against the wishes of his client. This can leave the contractor owing thousands of dollars in costs to repair any damages caused by the subcontractor and may still leave him open for a civil lawsuit by the client.