What is Subcontractor?
Subcontractor explained in plain English. Learn what a subcontractor is, how they differ from employees, tax implications, and how to hire and manage subcontractors.
What Is a Subcontractor?
A subcontractor is an independent professional or business entity hired by a prime contractor or business owner to perform specific work or services that are part of a larger project or contract. The key distinguishing feature: a subcontractor is engaged by the primary contractor (not the end client), and the subcontractor typically performs work outside the prime contractor's core expertise or bandwidth. For freelancers and small business owners, subcontractors are the way to scale your practice without hiring full-time employees. If a client project requires skills you don't have — say, a graphic designer gets a project that needs copywriting — they hire a subcontractor to handle that portion while they manage the overall project and client relationship. Subcontractors are not employees. They're self-employed individuals or businesses with their own clients, their own methods, and their own tax obligations. Misclassifying a subcontractor as an employee is one of the costliest mistakes a business owner can make.
Subcontractor vs. Employee: The Critical Distinction
| Factor | Subcontractor | Employee | |---|---|---| | Control over work | Sets own hours, methods, tools | Employer directs how work is done | | Payment basis | Per project, per deliverable, or flat fee | Hourly, weekly, or salary | | Tax treatment | Self-employed; pays own taxes | Taxes withheld by employer | | Benefits | None from the hiring party | May receive health insurance, PTO, etc. | | Equipment/tools | Provides their own | Employer typically provides | | Work for others | Can work for multiple clients | Usually exclusive to one employer | | IRS form | Requires 1099-NEC if paid $600+ | Requires W-2 | | Training | Generally skilled before hiring | May require training by employer | The IRS uses a 20-factor test (behavioral and financial) to determine worker classification. When in doubt, consult a tax professional — misclassification penalties are severe.
Tax Implications of Hiring Subcontractors
As the hiring party, you have specific tax obligations: 1. 1099-NEC Filing: If you pay a subcontractor $600 or more in a year, file Form 1099-NEC with the IRS and provide a copy to the subcontractor by January 31 of the following year 2. No withholding: You do NOT withhold taxes from subcontractor payments — they're responsible for their own 3. Independent contractor status: The subcontractor should be set up as a sole proprietorship, LLC, or corporation — verify their EIN or SSN 4. Deduct payments: Subcontractor fees are a business expense for you, reducing your taxable income
Example of Hiring a Subcontractor
A freelance marketing agency owner lands a $25,000 contract to build a full digital marketing campaign for a retail client. The project requires: - Web development (not her skill) → Hires a subcontractor at $5,000 - Graphic design → Hires a subcontractor at $3,000 - Copywriting → Does this herself - Project management → Does this herself Her economics: - Total contract: $25,000 - Subcontractor costs: $8,000 - Her direct labor/value add: $17,000 - Net margin (before her own taxes and overhead): $17,000 She issues 1099-NECs to both subcontractors at year-end.
How It Relates to Invoicing and Business
When you hire subcontractors as a freelancer, their fees directly affect your gross margin and pricing. You need to mark up their costs when billing the client, or factor their cost into your overall project fee. Always agree on subcontractor rates and payment terms in writing before the project starts. For invoicing, client reimbursable expenses and subcontractor costs are separate line items — but both reduce your net unless properly marked up. Related reading: - 1099 Form: Reporting Contractor Payments → - Independent Contractor vs. Employee → - 1099 vs. W-2: Freelancer's Guide → Key Takeaways: 1. A subcontractor is an independent professional hired to do part of your contracted work 2. Subcontractors are NOT employees — they control how, when, and where they work 3. File a 1099-NEC for any subcontractor paid $600+ in a calendar year 4. Misclassifying an employee as a subcontractor carries severe IRS penalties 5. Subcontractor costs are a business expense — mark them up when billing clients Scale your freelance business with the right team — Try Eonebill Free