Differences Between Independent Contractor and Subcontractor
- Published Aug 06, 2020
With small businesses looking for ways to do more with limited resources, lean practices — like outsourcing instead of hiring new staff for specialized tasks — have shifted work relationships and roles. As companies bring in contractors, it is important to understand how the title of independent contractor vs. subcontractor can impact responsibilities when it comes to workers’ compensation.
This overview will help you determine the differences between an independent contractor and subcontractor, as well as best practices when it comes to workers’ comp for contractors.
What Is an Independent Contractor?
An independent contractor is an individual who enters into an agreement with an individual or business to complete a job or task. They may be considered self-employed or a sole proprietor. Depending on the type of service provided and industry, this could be an ongoing service, like monthly payroll, or one-time assignment, like building a new website. Unlike employees, independent contractors determine the terms of how they perform the task they are contracted to complete.
Because independent contractors are not employees, they do not usually have taxes withheld when they are paid for their work. Benefits like retirement plans, vacation time, and sick pay do not extend to contract workers. They also are not covered by insurance plans held by the companies for which they are doing work, including those for liability or workers’ compensation.
What Is a Subcontractor?
Like an independent contractor, a subcontractor is usually self-employed. However, rather than enter into a direct contract with a business or individual to complete a task, subcontractors work for the individual or entity contracted to do a job. So that might mean a subcontractor is paid by an independent contractor to design graphics for the web app that the independent contractor is building for a company. Subcontractors decide the terms of their tasks and performance, and they may be a part of a subcontract agreement with the independent contractor.
A subcontractor is not considered an employee of the contracting company or the independent contractor, and is responsible for paying their own taxes. They also do not accrue benefits or receive insurance coverage from the contracting party or independent contractor.
Is Workers’ Comp for Subcontractors and Independent Contractors Necessary?
In most states, you are not required to provide workers’ comp coverage for independent contractors or subcontractors that are doing work for your business. However, sometimes an arrangement with contractors may be such that your state considers them employees, even if the IRS does not. It’s important to have a clear understanding of your state workers’ compensation laws to ensure that your coverage properly accounts for those working for your business.
It’s also important to note that if an independent contractor or subcontractor does not have workers’ compensation insurance and is injured while working under contract (or subcontract) for your business, your company could potentially be held accountable for their medical and recovery costs, as well as loss of income. To protect your business, you may want to require that your independent contractors provide you with a Certificate of Insurance to show that they have workers’ comp coverage for themselves and that they will require any subcontractors to also provide proof of coverage.
Purchase Workers’ Comp for Contractors Online
At Cerity, we make protecting your company our business, whether you are a small business, independent contractor, or subcontractor. That’s why we offer a simple, online solution so you can quickly get the coverage you need, whenever you need it. Get a free quote for workers’ comp insurance with our free online quote tool.