Potential Advantages of Classifying Individuals as Subcontractors versus Employees

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Employers have many advantages when classifying an individual as an independent contractor rather than an employee when the rules allow for an individual to be treated as an independent contractor. There are many Federal and State laws to abide by when choosing an individual’s classification and many times you will find that they could fall under each classification depending on which law you are examining.

When making a decision on the type of classification, some key factors should be considered that are beneficial when the subcontractor class is taken:

  1. You are not liable for an accident that is caused by an independent contractor but will be liable if this individual is treated as an employee.
  2. If you hire a subcontractor, generally speaking, you do not have to withhold payroll and income taxes, therefore you would not be liable to remit these taxes. If the individual is classified as an employee, failure to remit these taxes can result in substantial penalties.
  3. If classified as a subcontractor, you will not have to pay for this individual’s workers compensation insurance*, the employer half of social security taxes or any unemployment taxes, both Federal and State, which could result in significant savings.
  4. There are a few more expenses that can be saved by classifying the individual as an independent contractor which are health insurance coverage (if classified as an employee, typically you will have to offer the same benefits as offered to the rest of the employees), pension and profit sharing expenses and non-reimbursed business expenses.  If no health insurance is offered to the independent contractor, in addition to these savings, generally COBRA coverage does not apply when the independent contractor ceases to do work for the company.
  5. If the individual is classified as an independent contractor, the U.S. Occupational Safety and Health Administration (OSHA) rules and regulations do not apply.

In summary, classifying an individual as an independent contractor rather than an employee has some significant advantages. When treating an individual as an independent contractor it is critical to document the reasons why the individual is deemed as an independent contractor, and to also make sure all appropriate forms are beings completed. If the classification is ever challenged, these precautions will help provide sufficient support for your decision.

If an independant contractor is injured on your worksite and not covered by their own worker’s compensation policy, the costs of treatment for injury may be applied to your worker’s compensation policy.  The best and only way to protect your business from adverse claims resulting from uninsured independant contractors is to request a “proof of coverage” certificate from the independant contractor before they are awarded work from your organization.