In the contract world, contractors are paid in two ways: as independent sub-contractors or as a W-2 employees. These two terms explain your relationship with Gardner; they also come with significant tax differences.
Big picture, independent sub-contractors are not employees of Gardner. They either own and work for their own company, or work for an agency. They have no taxes withheld from their paychecks by Gardner. These companies do business directly with Gardner just as any vendor or supplier would except your work is with a Gardner client. W-2 employees are usually considered employees of Gardner and have social security and certain taxes withheld from their paychecks.
Because W-2 employees have social security and taxes withheld, they often only have to be concerned with filing their taxes every year before April 15th. Independent sub-contractors, often have certain tax liabilities each quarter. Because nothing is being withheld from your check, the government will most likely want you to pay estimated taxes on your income each quarter.
When working as a W-2 employee through a firm like Gardner, the firm has the direct relationship with the client. When our client has a need for a contractor, we reach out to you to provide the actual services, hire and pay you, and provide other benefits such as health insurance and retirement benefits. We pay you as an employee of Gardner. We report your earnings to the IRS on a form W-2, pay you per your contract, withhold federal and state income tax, and pay our share of your social security tax. We are held to all federal and state employment laws when employing you. You are not an employee or contractor of our client, even though you work within their facility.
When working as a sub-contractor through Gardner, Gardner retains the direct relationship with the client. In fact many larger clients will only work with companies like ours and not with individuals. As you provide the actual services, we pay you (your company), as we would pay any vendor or supplier. You are not employed by Gardner, but your own company, and while you may work at our client’s site, you have no direct contractual relationship with our client.
Typical advantages of incorporated independent sub-contractor status:
- Personal freedom – you are employed by, your company (yourself).
- No taxes withheld from your pay check by Gardner – although you are still responsible for payment of all taxes and may face a larger tax burden because Gardner does not contribute to your taxes as an employer would.
Typical advantages of W-2 employment status:
- Predictable regular pay checks.
- Taxes withheld from your paycheck with Gardner contributing a portion. Typically there is no need to file estimated taxes.
- Eligibility, in most cases, for employee benefits such as health care and 401k retirement savings account.
The best way to determine the specifics around independent sub-contractor versus a W-2 relationship is go to the source, the Internal Revenue Service. The IRS has an Independent Contractor Test which is explained below.
IRS Independent Contractor Test