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Home > Blog > What’s the Difference Between a 1099 Employee and a Subcontractor?
THURSDAY, JULY 8, 2021

What’s the Difference Between a 1099 Employee and a Subcontractor?

It’s easy to confuse the terms independent contractor and subcontractor, and you should not use them interchangeably. In the end, whether someone is a subcontractor or independent contractor could make all the difference in how your company’s insurance coverage applies to them, and how responsible you are for liabilities that arise on their watch. Here’s how it works. 

What is a 1099 Employee? Finger touching Insurance

A 1099 employee is an independent contractor. They are not an employee of your business, but rather they work for themselves. The 1099 designation refers to the requisite 1099-MISC tax forms that you will be required to send to these parties during tax season. 

Independent contractors sign a contract with your company to provide certain goods or services, and they usually receive payment from your company’s accounts receivable, rather than from your payroll. You will often not be obligated to pay for benefits, withhold taxes or provide other services as you would be required to do for standard employees. 

For all intents and purposes, hiring a contractor allows you to dictate what the result of work will be. For example, if you hire an IT contractor to run your company’s cyber security system, then you will naturally be able to set expectations on what needs to be done. However, the independent contractor will still maintain a degree of independence in making decisions about how they do the project. Therefore, you won’t have the free ability to set rules for them in the way you would for a standard employee. 

What is a subcontractor? 

When you hire an independent contractor, then that contractor might in turn need to hire other contractors to complete their work. This is a subcontractor, and their relationship to your business is that they are bound to follow a contract set by the independent contractor (which also remains within the bounds of your own contract). The subcontractor is also paid by the independent contractor (though they might do so using part of the funds that you agree to pay them). 

For example, suppose that your IT contractor does not offer data recovery services themselves, but rather outsources that to another company. In the event that you need data recovery at some point, then the subcontractor would be contacted by the independent contractor, and they would provide the requisite services. 

How does this affect my insurance qualifications? 

Both independent contractors and subcontractors are tied to your business, which means that they assume liabilities by working with you, and you face the same risks by working with them. In many cases, both independent contractors and subcontractors will be responsible for having their own liability insurance. This can free you from responsibility for third-party losses if someone alleges that one of your contractors did something wrong.  

Still, you should inquire whether your liability coverage is able to provide coverage for contractor liabilities, as well. After all, you never know if you might be the target of a lawsuit based on a mistake that a contractor makes. Therefore, don’t hesitate to work with your insurance agent to set the appropriate benefits for your operational needs. 

Posted 5:26 PM

Tags: workers compensation
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