Subcontractor or Employee? Get Worker Classification Right Every Time

Let’s set the scene: you’re running a business, you’ve got a mountain of work, and you need help. You bring someone on board, thinking, “Great! Subcontractor it is—less paperwork, no benefits, no problem.” But wait—before you pop the confetti, the IRS knocks on your door and asks, “Are you sure about that?” Suddenly, what felt simple gets very complicated. 

Don’t worry—you’re not alone in this. Figuring out whether someone is a subcontractor or an employee isn’t always clear-cut, but getting it right can save you headaches, fines, and maybe even your favorite coffee mug from being thrown across the room. Let’s break it down. 

Watch: Subcontractor or Employee? Eric Breaks It Down

Before diving into the details, watch this Kaizen Time episode where Eric Joern, CPA explains how to correctly classify workers, avoid costly mistakes, and stay compliant.

Hit play to get expert insights in just a few minutes!

Why This Matters More Than You Think 

Here’s the deal: classifying someone incorrectly isn’t just a slap-on-the-wrist kind of mistake. It can cost you big time—think penalties, back taxes, and maybe even a lawsuit or two. And it’s not just about staying on the IRS’s good side (though, let’s be honest, that’s a pretty solid goal). Proper classification sets the tone for how your business operates and how your workers feel about their roles. 

An employee works under your rules—they’re like the A-team, clocking in, following your processes, and getting paid regularly with a nice, tidy W-2 at tax time. On the other hand, a subcontractor is more of a lone wolf. They do their thing, use their tools, send you an invoice, and you hand them a 1099. But here’s the kicker: the IRS assumes everyone is an employee unless you can prove otherwise. Yup, the burden of proof is on you. 

Breaking It Down: How to Tell Who’s Who 

The IRS has three main questions to help you figure out if you’ve got a subcontractor or an employee. Spoiler alert: it’s not always as straightforward as you’d like. 

1. How Much Do You Control? 

The first big question is all about control—who’s calling the shots? If you’re telling someone when to work, how to work, and what tools to use, congratulations, you’ve probably got an employee. Subcontractors, on the other hand, call their own shots. They might roll in at noon, work their magic, and leave before happy hour. They get the job done, but how they do it is up to them. 

For example, imagine you’re running a salon. If your stylists use your products, follow your schedule, and report to you daily, they’re employees. But if they rent a chair, bring their own clients, and pick their own hours? That’s a subcontractor situation. 

2. Who Handles the Money Stuff? 

Now let’s talk dollars and cents. Subcontractors generally manage their own finances. They set their rates, cover their expenses, and handle their taxes. If they’re taking a risk of profit or loss, that’s a big clue you’re dealing with a subcontractor. Employees, on the other hand, are paid a set rate and might even get reimbursed for expenses like gas or supplies. 

Here’s a classic example: truck drivers. If you’ve got someone driving your truck on your schedule, they’re probably an employee. But if a trucking company is invoicing you for services, that’s clearly a subcontractor. Keep those lines crisp and clear, my friend. 

3. What’s the Relationship? 

Finally, think about the nature of the relationship. Do you offer benefits like health insurance, paid time off, or a retirement plan? Do you expect the person to stick around for the long haul? If so, that’s employee territory. Subcontractors, by contrast, operate more like business partners—they’re there to do a job and then move on to the next. 

Where Things Get Messy: Industry-Specific Challenges 

Some industries are notorious for walking the fine line between subcontractor and employee. Salons and trucking are two great examples, but this applies across the board. 

Take salons: Some owners hire stylists as employees, paying them wages and dictating their schedules. Others rent chairs to stylists, letting them operate as independent businesses. The difference? One involves control and regular paychecks, and the other involves freedom and rental agreements. 

Trucking is another tricky one. A company driver using your truck, following your routes, and relying on your maintenance? That’s an employee. But an independent trucking company billing you for completed jobs? Definitely a subcontractor. 

How to Get It Right (and Keep the IRS Off Your Back) 

Now that you’re thinking, “Oh no, did I mess this up?” take a deep breath. Fixing (or preventing) these issues isn’t rocket science—it just takes some diligence. 

Start by checking out the IRS’s guidelines—they’ve got a handy set of rules to help you out. Better yet, get a CPA or legal expert involved. They’ll not only help you classify correctly but also save you from second-guessing every decision at 3 a.m. 

And here’s a pro tip: Make it a habit to review your workforce regularly. Job roles evolve, and what started as a subcontractor agreement might morph into an employee relationship over time. Staying proactive can save you from messy transitions down the road. 

Why This Is Good for Business 

Getting classification right isn’t just about compliance—it’s about running your business like a well-oiled machine. When your workers know where they stand, they’re happier and more productive. And when you know your legal bases are covered, you can focus on growth instead of sweating the small stuff. 

At Kaizen CPAs + Advisors, we’re here to help small businesses tackle the tricky stuff—workforce classification, tax compliance, and strategic planning. Let us take the guesswork out of growing your business—click the ‘Let’s Chat’ button to get started! 

Skipped the video earlier? Watch it now for Eric’s full breakdown!