Owning a business and being one's own boss is an essential part of the American dream. The relationship between contractors, who are able to bid for and obtain large projects, and subcontractors, who are better able to perform the individual tasks of the project, is essential to capitalist prosperity. But, as many workers have discovered, classification as a subcontractor can be an unwanted barrier to the basic benefits most employees enjoy.
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A subcontractor is an individual or business that does specific work according to a contract with another individual or business who is contracted to perform the work for a third party. In most cases, as in building construction, the contractor's responsibility is a larger job of which the subcontractor's work is only a part. In some instances, the subcontractor has a regular relationship with the contractor that resembles that of an employee, but is treated instead on a per job, freelance basis.
For an employer, using subcontractors can have significant benefits. In principle, contractors use subcontractors to transfer some of the cost, risk and responsibility of a large job. Subcontractors are usually specialists that can perform specific tasks faster, better and cheaper than the contractor. But the laws in each state also have different tax and accounting rules for corporations with significant numbers of employees, including withholding taxes, minimum wages, workers' compensation liability and health care benefits. By using subcontractors instead of employees, de facto employers can avoid these financial and social obligations.
Of course, the benefit to employers is a loss for the employees. When treated as subcontractors instead of employees, workers lose rights to overtime pay, unemployment insurance, union protection and freedom from discrimination, in addition to losing their minimum wage, workers' compensation and minimum wage protections, and employer contributions to social security.
Whereas employees receive W-2 tax forms from their employers, subcontractors usually get form 1099. The W-2 form lists the employee's wages and enumerates deductions for income taxes, social security, Medicare, retirement contributions and other withholding. A 1099 represents only earned income, because a contractor is not required or authorised to withhold funds from a subcontractor. The result is usually that the subcontractor ends the year with an outstanding tax liability.
The test in the United States for whether a worker is an employee or a subcontractor is based on the Fair Labor Standards Act, and in some cases a judge might have to make the final determination (see Resources below). Among the factors considered are whether the worker or the employer owns the facility and equipment in which the work is performed, whether the worker can make more or less money based on their performance, the degree to which independent initiative is required in the job, and the degree to which the worker's performance constitutes the employer's primary business.
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