Chances are, your construction business hires subcontractors, rather than employees, to perform some of the work. These arrangements obviously save your company a lot of time, money and headaches. Take a look at some of the recordkeeping and financial differences:
With an |
With an Independent |
You must pay the employer's half of FICA, as well as federal unemployment tax (FUTA). |
You generally don't have to withhold taxes from the worker's pay, you don't owe the employer's portion of FICA and FUTA, and you don't have to pay workers' compensation. |
You are required to withhold federal income tax and the employee's half of Social Security and Medicare (FICA). |
It is easier to engage workers for specific, short-term assignments so tailor work crews to fit your slow and busy seasons. |
You must issue a W-2 form to the employee and send copies to the IRS. |
You must issue the worker a Form 1099-MISC and file copies with the IRS if you pay the person $600 or more during the year. |
Depending on your company's policies and state and federal laws, you must generally provide fringe benefits, such as health insurance, retirement plans, sick days and paid vacations. |
You are not required to provide fringe benefits. Subcontractors are responsible for keeping their own records, paying their own income and self-employment taxes, and providing their own health insurance. |
You are generally required to carry workers' compensation insurance. |
You can reduce exposure to some types of legal actions, such as wrongful termination lawsuits. |
When you compare the two types of workers, hiring subcontractors is a no-brainer. But make sure your independent workers really qualify for this status under law. Your company can pay a heavy price if you treat an employee as an independent contractor without having a "reasonable basis" for doing so. The IRS routinely "reclassifies" contractors as employees and the costs can be devastating for business owners. You can be required to pay a fortune in unpaid federal payroll taxes, interest and penalties.