When you're self-employed, you run your own business and serve your own clients. As a subcontractor, you're hired by a business to help meet its clients’ needs. Unlike employees, subcontractors also work for themselves. A key difference between being self-employed and being a subcontractor is determined by whether you’re serving your own client or someone else’s.
Whether it’s selling handcrafted furniture out of your garage, opening a small downtown deli, or launching a consultancy business online, you’re self-employed when you’ve secured the necessary licenses, registered your trade name with the government and accepted your first paying customer. The IRS distinguishes self-employed individuals as those who have the right to control how their work will be done. Conversely, employees do not have the right to control how their work gets done, as employers are ultimately responsible for the quality and performance standards their employees deliver. When you’re self-employed, you set these standards for yourself and for any employees you hire.
Being self-employed, the IRS considers you an independent contractor. Being hired by another independent contractor on a per project basis makes you a subcontractor. Subcontracting happens often with complex projects requiring many specialties. For example, if your business is building houses, you might hire subcontractors for various installation tasks such as plumbing, Internet and telephone, heating and air conditioning, electrical or landscaping. Subcontractors can also provide specialties that let you expand what you offer your clients without the expense of hiring employees. For example, if your business is software development, you might subcontract work to one or more programmers who are proficient in particular coding languages to allow you to meet a client’s particularly sophisticated needs.
As an independent contractor, you profit from meeting needs and providing solutions for your clients. As a subcontractor, you profit from helping to meet needs and provide solutions for another independent contractor’s client. Your product, service or expertise might contribute to an end client’s solution that many contractors are working on simultaneously. Additionally, when serving a client directly, you negotiate the terms, schedules and prices for the entire project with the client. Conversely, subcontractors get hired to work within those terms that are already set.
Independent contractors and subcontractors are both considered self-employed by the IRS. Both are responsible for making quarterly tax payments including self-employment tax. Neither receives employee benefits from their clients or protection under laws that govern employer-employee relations, according to the U.S. Small Business Administration. As either a main contractor or subcontractor, you decide your hours of operation, negotiate your fees and pick the projects to take on. Either way, you’re also legally responsible for licenses and insurance you’ll need to operate, and for honoring your contracts with clients and other contractors. Additionally, you’re free to hire subcontractors even if you’re a subcontractor yourself.
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