Subcontractor Vs. Employee: What’s The Difference? (2026)

What Defines a Subcontractor?

A subcontractor is a business or self-employed professional who performs work for a contractor on a specific project. They are responsible for handling their own taxes, insurance and other benefits. These professionals can negotiate rates, and they choose which jobs to take.

Unlike employees, contractors use their own equipment and other work supplies.

What Defines an Employee?

An employee is someone who permanently works for a specific business. They may work full-time or part-time. Employees aren't considered business owners, so their employer handles tax withholding, provides work supplies and offers insurance benefits, if required.

Employees are paid on an hourly or salary basis, and they usually receive pay biweekly or once per month.

Key Differences Between Them

It can sometimes be challenging to determine whether you should create an employment contract or a subcontractor agreement when you hire someone. These are a few critical differences:

• If a company tells someone what work is to be done and how it is to be done, that person is probably an employee.
• If a worker decides what methods they use to create a final result, they’re likely a contractor.
• Contractors and subcontractors may offer services to competitors, but employees may not.
• Employees have long-term relationships with the companies paying them, but subcontractors may not.

Essentially, if a person is an employee, the employer provides the tools and training needed for the job. Subcontractors are responsible for their own training and tools.

Tax Forms and Pay Structures

Employees are paid on an hourly or salary basis. You’ll need to provide each one with a W-2 tax form.

On the other hand, subcontractors are usually paid by the project. When you have someone sign a subcontractor agreement, you usually don’t have to withhold taxes for them. However, you’ll need to give each subcontractor a 1099-NEC tax form.

Classifying Workers Correctly

Misclassifying an employee as a subcontractor can have serious consequences. You may be responsible for back tax withholding and financial penalties.

Weighing the Pros and Cons

When deciding on hiring a subcontractor vs. employee, it’s important to weigh the benefits and drawbacks of each.

With a subcontractor, you only pay them for the actual work that they do, and you don’t have to worry about handling taxes or benefits. However, because they work for many business owners, they may not always be available. They may also work for competitors.

When you hire an employee, you have more control over when and how they perform work. Because they work for you and not competitors, they can gain more familiarity with your business. However, you’re responsible for handling taxes and benefits.

Subcontractor vs. Employee: Making the Decision

Whether you choose to work with subcontractors or hire employees, having the right contracts in place is critical to protect everyone involved. To learn more, discover our extensive library of legal forms and guides at ConsumerShield today.