Each company will hire a subcontractor at some point to assist with some task or project -- but what does that really mean? Also, when should you not sub work out? Before anything else, we have to understand what the Internal Revenue Service considers a subcontractor.
According to the IRS, a "subcontractor is a worker who is not your employee. You give a Form 1099 to a subcontractor showing the amounts you paid him. The subcontractor is responsible for keeping his or her own records and paying his or her own income and self-employment taxes."
Don't you just love Uncle Sam? It's OK -- no one does. At the end of the day, we have these regulations in place to protect the American businessperson, employee, client, and, yes, subcontractor. Before jumping into what jobs are ideal for sub's, I know it is vital to identify the bare minimum of documents needed from your subs before you issue them a payment.
Documents required before payment:
- Form W9 (link)
- Subcontractor Agreement (link)
- Detailed Invoice for work performed
- Certificate of Insurance with a General Liability and Workers Compensation Policy
Now, why? Well, I'll tell you. The W9 provides you with the subs taxpayer ID and certification. This is needed when your bookkeeper or tax preparer (hint, hint) asks for the source documents to coincide with the payment. Digisist and other bookkeepers will need this documentation because they will be tracking any expenditures over $600. After $600, you will be required to file a Form 1099 to the sub at the end of the year. A 1099 is similar to a Form W2, except it is for non-employee compensation.
Subcontractor agreements are very similar to a contract that you would have your client sign to engage in business with you. They will typically be comprised of identifying the parties involved, the scope of work, the conditions of payment, and, any other special conditions, like a Non-Disclosure Agreement. I did provide a link to LegalZoom above, however, I strongly believe in building a relationship with a local business attorney who can draft you a sub-agreement specific to you. That's my opinion -- take it or leave it.
As we all know, employees are typically paid by their time worked as recorded on their timecard. With subs, they must invoice you for their work performed. More importantly, subs are not permitted to be instructed to be told when and where to work. They are only allowed to have a scope of work and an agreement in place to get that work done for a determined amount of money and time. Please don't take my word for it, check out this article by the IRS.