Differences/Risks between an Employee and Sub-Contractor

Lately, more and more business owners who want to save on employment taxes treat employees like contractors and issue 1099 them rather than set up payroll with a W-2.

We understand that you want to save money in this area of your business, employment taxes, workers compensations, unemployment, etc. can be a pain and expensive. However, just because you ‘say’ they are sub-contractors and give them a 1099, doesn’t make them a sub-contractor. Here are the two concerns that you need to be aware of:

First, the IRS consistently warns taxpayers that if you are caught paying ‘employees’ as ‘sub-contractors’, you will pay stiff penalties on top of the taxes and interest owing for payroll withholding that should have taken place.

Second, is the asset protection/liability issue; a Workers Compensation claim could be worse than the IRS. If you are paying an ‘employee’ as a ‘sub-contractor’ and not carrying Workers Compensation Insurance, who do you, think is going to be liable if they get hurt on the job? YOU-of course. More than likely, you will also be personally liable and your corporate veil won’t protect you either. This is because in the eyes of the Court, you should have known better and were acting recklessly or negligent in not carrying insurance.

Please be careful and know that we can set you up with the payroll service, 1099’s, the employee or sub-contractor agreements, etc.. Please give us a call us at 773-728-1500 to discuss this issue.