Contractors are self-employed people who typically work on a job-by-job basis, instead of working as employees at a company. Contractors are responsible for their own benefits, taxes, insurance, retirement and other aspects of running a business.
But how do you know if a contractor is a subcontractor vs. an independent contractor?
What is a subcontractor?
In many industries, it’s common for a contractor in charge of a project, usually called a general contractor, to hire other contractors — called subcontractors — to help get a job done.
Hiring subcontractors allows the general contractor to manage the project and deal with the client while “subbing out” more specialized tasks.
For example, a general contractor hired to construct a building might hire a crew of subcontractors, including electricians, plumbers, HVAC specialists and masons. The general contractor would direct the crew, deal with vendors and liaise with local officials while interacting directly with the client.
When one contractor hires another, the two parties typically sign a subcontractor agreement that describes the nature of the work and how the subcontractor will get paid. It’s important that both parties carry contractor insurance, as one contractor’s policy may not always cover the other contractor.
What is an independent contractor?
An independent contractor is a self-employed person who works for a client, typically on a temporary or per-job basis, rather than as an employee of a company.
Legally, both general contractors and subcontractors are considered "independent contractors," as a client hires both on a per-job basis. The difference is that a general contractor is usually hired by a property owner or manager, while another contractor hires a subcontractor.
Like other self-employed people, independent contractors need to have a business entity. Two of the most common business structures for independent contractors are a sole proprietorship or a limited liability company (LLC).
Independent contractors are responsible for calculating and paying their own taxes. Typically independent contractors pay income tax in addition to self-employment tax. But independent contractors may also take tax deductions not available to traditional employees.
Do independent contractors need insurance?
Whether you’re a general contractor, subcontractor or another kind of independent contractor, it’s a very good idea to have contractor insurance. If you’re set up as a limited liability company, you may want to consider business insurance for an LLC.
Accidents can be very costly, but independent contractors don't have the resources of a large company. That's why getting covered is so important— you have some help paying for things if something goes wrong.
How NEXT helps protect independent contractors
At NEXT, getting independent contractor insurance is fast, easy and affordable.
In about 10 minutes, you can complete an application, see your policy options, get a quote and purchase coverage. As soon as your purchase is complete, you'll get access to your digital certificate of insurance.
If you have questions, our licensed, U.S.-based insurance professionals are ready to help.
Get your free quote today.