How do I pay subcontractors vs employees?
Employees and subcontractors get paid through completely different processes. Getting this wrong creates tax problems, penalties, and potential legal exposure. Here’s how each works.
Employees must be paid through payroll. You withhold federal income tax, state income tax, Social Security, and Medicare from each paycheck. You also pay the employer portion of FICA taxes plus unemployment taxes. Before their first paycheck, collect a W-4 for withholding elections and an I-9 to verify work eligibility. Employees need to be covered by workers’ compensation insurance in Massachusetts.
The payroll process runs on a set schedule, whether weekly, biweekly, or semi-monthly. Each pay period you calculate gross wages, apply withholdings, and remit net pay. Payroll taxes get deposited on schedule and filed quarterly on Form 941. At year end, you issue W-2s to each employee.
Subcontractors work differently. You pay them directly with no withholdings. They invoice you for work completed, and you pay the invoice amount in full. No payroll taxes, no withholdings, no workers’ comp requirement on your end. The sub handles their own taxes as a self-employed individual or business.
Before you pay any subcontractor, collect a W-9 form. This gives you their legal name, address, and tax ID number. You need this information to file 1099-NEC forms at year end for any sub you paid $600 or more during the year. The deadline is January 31st. Miss it and you face penalties.
In your books, employee wages run through payroll accounts with separate tracking for wages, employer taxes, and benefits. Construction contractors often code labor to specific jobs so they can see true labor cost by project. Subcontractor payments hit expense accounts and should also be coded to jobs if you’re tracking job costs. The chart of accounts treatment reflects the legal distinction.
Massachusetts takes worker classification seriously. The state uses an ABC test that presumes workers are employees unless you can prove otherwise. The worker must be free from your control, perform work outside your usual business, and have an independently established trade. Misclassifying an employee as a subcontractor exposes you to back taxes, penalties, and potential lawsuits.
For small business bookkeeping in MetroWest Massachusetts, keeping employee and subcontractor records clean and separate matters. Your books need to clearly distinguish payroll expenses from subcontractor expenses. Your 1099 tracking needs to capture every sub payment throughout the year so January doesn’t become a scramble for W-9s you never collected.
If you’re unsure whether someone should be classified as an employee or subcontractor, get professional guidance before you start paying them. Reclassifying after the fact is expensive and complicated. Getting it right from the start is much easier.
Greater Boston's Trusted Bookkeeping Partner
The Next Step:
A Short Conversation
We'll ask a few questions, figure out what you need, and give you a straightforward quote.
More Questions
What strategic advice can a fractional CFO provide?
A fractional CFO provides forward-looking financial guidance on growth decisions, pricing strategy, cash flow planning, capital investments, and exit planning. They translate your financial data into actionable recommendations for major business decisions.
Read answerShould I outsource bookkeeping or do it myself?
The answer depends on your transaction volume, how much your time is worth, and whether you'll actually keep up with it. DIY works for simple businesses that stay current. Most owners fall behind and end up paying more to fix the mess.
Read answerWhat bookkeeping do restaurants need?
Restaurants need daily sales reconciliation, accurate tip tracking, food cost monitoring, and payroll that handles tipped employees correctly. The goal is producing reliable prime cost numbers so you can spot margin problems before they hurt.
Read answerWhat financial reports do professional services firms need?
Beyond standard P&L and balance sheet, professional services firms need AR aging reports, utilization tracking, and project profitability analysis. These reports address the unique realities of time-based billing and slow-paying clients.
Read answerWhat documents do I need for catch-up bookkeeping?
Bank and credit card statements are essential. Prior tax returns, your existing QuickBooks file, and any invoices or bills you have will speed things up. Missing some paperwork doesn't stop the project.
Read answerHow do I predict when I'll run out of cash?
Build a rolling 13-week cash flow forecast. Start with your current bank balance, add expected inflows week by week, subtract expected outflows, and watch where the running total goes negative. Update it weekly to stay ahead of problems.
Read answer