Definition

• A subcontractor is a person who is not an employee of the payer. Unless an employer controls how the work is done or has the power to do so, controls the financial aspects of work and the relationship is legally outlined as an employee/ employer relationship, a worker is considered a subcontractor. When deciding whether or not you are a subcontractor or an employee, consider who approves your vacation and sick days and how the contract that defines your services is outlined. Subcontractors receive a 1099 instead of a W-2.
  
  

Illustration

• Jim is a carpenter who bid on a two-month job that pays $60 per hour. Jim is paid $2,000 every two weeks for two months, equaling a total of $8,000. No matter how many extra hours are required to finish the job, Jim is paid at the pay scale he agreed to when he signed the contract for the bid. Jim gets all of his work through ads he places online and in the newspaper. Based on IRS law, Jim is a subcontractor and not an employee.
  
  

Withholding

• America employs a progressive pay-as-you-go tax system whereby all income earners are expected to pay tax as they earn income. Whereas employees have federal income tax withheld from their pay by their employer, subcontractors are responsible for paying estimated tax. Estimated tax payments are four equal payments made quarterly to the IRS. They are due on January 15th, June 15th, September 15th and April 15th. If you are a subcontractor and do not make estimated payments, you may be subject to an underpayment penalty by the IRS. Use IRS publication 505 to figure your estimated payment amount.
  
  

Filing

• Generally, taxpayers are not required to file an income tax return unless their income reaches a certain level. For example, in 2010 taxpayers were not required to file unless they were single and their gross income exceeded $9,350; $18,700 for married filing jointly; $3,650 for married filing separately; $12,050 if head of household; and $15,050 if a qualifying widow or widower. However, self-employed persons are required to file if their income is at least $400.