Key takeaways:
Understanding the differences between subcontractors and employees is key for making informed hiring decisions and staying compliant as a business owner.
- Key role differences matter. Subcontractors are independent, self-employed individuals hired for specific projects, while employees work for you on a continuous, scheduled basis as part of your team.
- Pros and cons impact business flexibility. Subcontractors offer specialized skills, flexibility, and fewer overhead costs, but may have limited availability and set their own rates. Employees provide consistency, control, and loyalty, but require more paperwork, tax responsibilities, and long-term commitment.
- Legal and tax responsibilities differ. Employees require payroll processing, tax withholding, and benefits, while subcontractors manage their own taxes and benefits. Misclassifying workers can result in penalties, so be sure to follow regulations closely.
- Hiring and management processes aren’t the same. Bringing on subcontractors involves agreements and verifying compliance, while hiring employees means onboarding, training, and integrating them into your service business.
- Mixing subcontractors and employees can support business growth. Choose the arrangement that best fits your staffing needs, project volume, and long-term goals. Always stay informed about your obligations as an employer or contractor.
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Originally published August 30, 2024. Last updated on August 28, 2025.
Both subcontractors and employees help you get work done and keep projects moving in your business. But when it comes to responsibilities and employment law, the two roles are very different.
Knowing the major differences in employment status protects you both legally and professionally.
In this guide, we’ll explore the most important distinctions between subcontractors and employees, and you’ll better understand how each one guides your hiring decisions.
What you’ll learn in this guide:
*Disclaimer: This article should not be considered tax advice, and you should not rely on using it to file your taxes or comply with labor laws. Seek professional guidance for assistance when filing your taxes and making compliant hiring decisions.
What is a subcontractor?
A subcontractor is a qualified individual who works for another contractor on a temporary basis.
Subcontractors are typically hired in two situations: when a contractor is too busy to complete all the work within the desired timeframe, or when the project requires specialized skills—like electrical, HVAC, or plumbing—that make subcontracting the right choice.
Subcontractors are considered self-employed (operating as sole proprietors) and are responsible for their own taxes, supplies, health benefits, and insurance. The subcontractor can accept or reject new projects, work according to their own timelines, and negotiate their price per job.
Subcontractors are common in many service-based industries, including:
- Lawn care
- Painting
- HVAC
- Electrical
Pro Tip: Because many subcontractors aim to complete as much work as possible in a short time, their turnaround for deadlines may be faster than full-time employees.
How to hire a subcontractor
If you’re ready to bring on extra help, here are a few key steps to guide the process:
- Define the scope of work. Write out exactly what you need help with, including specific tasks, project goals, deadlines, and expectations.
- Check qualifications and experience. Look for subcontractors who have handled similar jobs in your industry. Ask for references, licenses, or a portfolio so you can see the quality of their past work before hiring.
- Confirm insurance and compliance. Protect yourself by ensuring they carry liability insurance and meet all local requirements, such as permits, trade licenses, or safety certifications. This reduces your legal and financial risk.
- Create a subcontractor agreement. Put everything in a written contract. Include the scope of work, payment terms, project timeline, quality standards, and how to resolve disputes.
- Establish communication and oversight. Decide how you’ll stay updated. For example, plan weekly check-ins, shared project management tools, or regular reports to keep work on track.
- Track payments and taxes. Subcontractors are paid per project or invoice, not through an employer’s recurring payroll. Keep organized records of payments and issue the proper tax documents (such as 1099 forms in the U.S.) at year-end.
Pro Tip: Use online and paper ads to spread the word that you’re looking for employees and subcontractors. Post a simple job ad and share it on your social media accounts. To attract the right candidates, be clear that you’re looking for a contractor rather than a full-time employee.
Pros and cons of hiring a subcontractor
Hiring subcontractors comes with unique pros and cons depending on the type of business you have and the industry that you’re in.
Some of the key benefits of working with subcontractors are:
- They are only paid for the work that they do, instead of being given a salary or an hourly wage
- They provide their own tools and equipment
- They’re responsible for their own taxes, benefits, vacation, and sick time
- They’re often motivated to do jobs more quickly than employees to maximize their earning potential
- It’s simpler to end the partnership if the work doesn’t meet your expectations
- You can find a great pool of subcontractors to work with and expand your business quickly
Hiring subcontractors can also have its downsides. Some of the cons of working with subcontractors are that:
- They work for multiple business owners and may not be available when you need them
- They set their own wage and hours
- They can turn down jobs as they please
- They have the option to work for other clients, which may turn them into your competitor
- You have little control over the quality of materials, tools, and supplies they use, unless you supply them yourself
What is an employee?
An employee is a professional who works for an employer on a consistent, permanent basis. They can be either full-time (40 hours/week) or part-time, depending on the number of hours they’re assigned.
A company employee is not considered to be a self-employed business owner. As a result, the employer is responsible for providing:
- Health or insurance benefits
- Vacation time and sick days
- Work supplies and equipment
- Employer-covered tax deductions
Unlike self-employed contractors, employees agree to the work and scope assigned by their employer. Employees are paid hourly or by salary, which is paid out on a recurring schedule—like bi-weekly or twice a month.
How to hire an employee
Hiring an employee is a little different than hiring a subcontractor, but there are familiar steps along the way. Subcontractors work independently, but employees become a direct part of your team. As a result, the process may involve more paperwork, planning, and ongoing responsibility.
- Define the role clearly. Just like with subcontractors, start by outlining exactly what you need for a part-time or full-time role. Write a job description that covers duties, required skills, expected hours, and basic information about the company.
- Post the job and recruit candidates. Use job boards, social media, local ads, and an employee referral program to attract applicants.
- Screen and interview. Take time to compare candidates to see how well they’ll fit your company culture. Interviews help you get a sense of their skills, reliability, and attitude. Since you’ll be working with an employee for longer than a seasonal contractor, take time to ensure it’s a good fit.
- Check references and legal requirements. Confirm past work experience and make sure you meet all state and federal hiring laws. Verify work eligibility (with an I-9 form in the U.S.), and collect tax forms like the W-4 for deductions and withholdings.
- Set up payroll and benefits. Employees are on your payroll, so you’ll need to handle tax withholdings, unemployment insurance, and any employee benefits you choose to provide. This is a key difference from subcontractors, who handle their own taxes.
- Onboard and train. Once hired, welcome your employee into the team with proper onboarding. Provide adequate training and set them up with the tools they’ll need to succeed.
If you’re used to working with subcontractors, hiring your first employee may feel like a bigger commitment. However, it can also give you more long-term stability and control as you build a team.
Pros and cons of hiring an employee
The commitment you get from employees is one of the reasons they can be so beneficial in certain roles. Some of the major pros of employees are:
- You set their schedule, track their time, and control their salary based on their work and schedule
- They can perform ongoing, consistent work, especially for recurring jobs
- You determine when, how, and where a job is done, and the deadline they need to complete it by
- They can become more familiar with your business practices, clients, and workflow, which gives you more control over customer service and the finished product
Pro tip: Hiring great employees is key to a successful business, and retaining them is just as important. Provide continuous feedback to build long-term relationships and motivate your employees.
Here are a few drawbacks to consider when hiring employees:
- Retaining employees can be challenging in some industries, especially if you perform seasonal work, like lawn care or landscaping
- Employees are paid for their time (hourly or salaried), not for the work they complete
- You are responsible for deducting payroll taxes from their wage and keeping accurate records of tax deductions
- You may be required (or choose) to provide paid vacation, sick days, and health benefits, which can be expensive
- Employment laws and other employee protections make it harder to let employees go after probation unless you have valid cause
What’s the difference between a subcontractor and an employee? [Comparison chart]
The main difference between a subcontractor and an employee is that a subcontractor is hired for specific projects, while employees work for the same employer on an ongoing basis.
Subcontractors choose their projects and hours, but don’t get traditional employee benefits—like employer-sponsored health insurance or 401(k) contributions.
Employees, on the other hand, follow their employer’s rules but gain perks and protections such as employer-sponsored retirement plans, PTO, and other workplace benefits.
This chart helps to showcase the main differences between employees and contractors:
| Qualifying characteristic | Subcontractor | Employee |
| Taxable income | Pays their own taxes | Has payroll taxes deducted automatically by their employer |
| Supplies and equipment | Provides their own supplies, office space, and equipment | Is given supplies, office equipment, and a workspace by their employer |
| Work schedule | Sets their own hours independently, may work outside of normal business hours | Receives specific work hours from an employer |
| Salary and earnings | Sets their own wage per project or per contract | Paid a wage determined by their employer or HR team |
| Freedom of choice | Can reject or accept jobs based on availability or personal preference | Cannot reject tasks or assignments that fall under the responsibilities of their role |
| Benefits and incentives | Does not receive health benefits, vacation or sick days, or unemployment insurance through the contractor | May be entitled to corporate health benefits, vacation and sick days, and unemployment insurance through their employer |
| Multiple jobs | Can work for multiple clients or businesses | Usually works for only one employer with a W2 employee status |
| Predictability of work | May not be offered consistent work by one contractor | Is hired on a permanent basis, until termination |
| Frequency of payment | Receives payment after a job is complete | Receives pay consistently on a determined schedule (bi-weekly, monthly, etc.) |
Tax forms and responsibilities
According to tax and employment laws, contractors, subcontractors, and employees all meet different criteria.
For tax purposes, the difference between subcontractors and employees is defined by how much control each party has in the working relationship. Subcontractors generally decide their own rates, hours, and projects. Employees, on the other hand, work under the direction of an employer who sets their pay, schedule, and job responsibilities.
Because of this difference, subcontractors are responsible for paying their own employment, Social Security, unemployment, and Medicare taxes. Employers must cover these taxes for their employees and also provide the correct tax forms each year.
Here’s what that looks like in practice:
- Employees: Provide W-2 forms (or T4 slips in Canada) to employees at the end of each year for tax reporting. Employers also file these forms with the IRS (or CRA in Canada).
- Subcontractors: When hiring subcontractors, the hiring party must collect a W-9 form from every non-employee (subcontractor). The W-9 provides the contractor’s valid tax ID number and address. At the end of the year, the person or business hiring the subcontractor then completes a 1099-MISC for any individual paid $600 or more during the calendar year. Business owners are required to report this as an expense, and the subcontractor must report their personal income to the Internal Revenue Service (IRS).
Knowing the difference in tax rules and guidelines helps both employers and subcontractors stay compliant and avoid frustrating surprises at the end of the year.
READ MORE: 30 small business tax deductions to save money when filing
Choosing between employees and subcontractors
As your business grows, you’ll find that subcontractors and employees serve different purposes.
If you need specific specialized skills, short-term, or seasonal work, subcontractors are often the best fit. But when you want ongoing working relationships and need long-term professional commitments, hiring your first full-time employee can be a smart choice.
Keep in mind, however, that contracting and employment don’t have to be mutually exclusive within your business. Depending on your industry and goals, you’re free to experiment and use a mix of both.
The most important thing is to understand what your legal obligations and responsibilities are so that you can become a better entrepreneur and leader.
Frequently Asked Questions
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A contractor is a qualified professional who takes on contract work or temporary roles and assignments. In many instances, contractors consider themselves self-employed business owners.
In this context, if you currently own your own service business, you’re considered a contractor.
A contractor’s job responsibilities can include:
• Securing more contracts for upcoming work
• Delegating or sharing work assignments with others
• Overseeing administrative tasks (like invoicing or bookkeeping)
• Managing client relationships
• Performing duties associated with a service business (general contracting, lawn maintenance, painting, plumbing, etc.)
• Ensuring compliance with permits, insurance, and safety regulations to protect the business and its clients
These responsibilities show how contractors act as both service providers and business owners who manage clients and daily operations.
Keep in mind: Many service-based businesses think about “contracting” in the context of a qualified general contractor, or GC. But general contracting is only one small part of the world of contract labor and services. There are many types of contractors, all serving with unique skills in a variety of industries.
READ MORE: Learn about the difference between contractors and handymen -
An employee works directly for a company and is subject to the company’s control (in terms of hours worked, project scope, and salary). An independent contractor (IC), however, operates as an independent entity. The IC provides services to a person or company under the terms of a contract, enjoying more autonomy over responsibilities and timing.
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For tax purposes, W2 employees have federal taxes like Social Security and Medicare withheld by their employer. In other words, the employer contributes to these taxes on the worker’s behalf. Subcontractors are in charge of paying their own self-employment taxes, including both the employer and employee portions of Social Security and Medicare.
This is one reason why subcontractors and self-employed workers need to set aside a higher percentage of their gross pay or income. -
Traditional employees typically receive corporate-sponsored benefits like employment insurance, paid time off (PTO), and retirement plans or 401(k) contributions from their employer. Subcontractors do not receive these benefits. Instead, they’re required to secure their own insurance plans, retirement contributions, and other entitlements or perks.
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From an employer’s perspective, working with and hiring full-time employees offers more control over how the work is done. This arrangement might also foster long-term loyalty and a productive company culture. On the other hand, the independent contracting model provides greater flexibility, can be more cost-effective for short-term or specialized projects, and reduces the employer burden of providing salaried benefits.
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Working with contractors can help you grow quickly, but you should always abide by fair labor laws to avoid worker classification. To make sure you receive the work you’re paying for, it’s also wise to sign a two-way independent contractor agreement. A document like this can be legally binding, ensuring that a contractor delivers on the work they’ve promised—and that you’re not out your investment.
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Yes. You can request a determination from the IRS using Form SS-8. They’ll review the details of the working relationship and give you an official ruling.