Key takeaways

• Independent contractors work directly with clients and control how they complete their work, while subcontractors are hired by another contractor to handle specific parts of a larger project.

• Every subcontractor is technically an independent contractor, but not every independent contractor is a subcontractor—the difference lies in who hires them and where liability sits.

• Misclassifying workers can result in back taxes, penalties, and legal exposure—the IRS, HMRC, and EU authorities are increasing enforcement in 2025.

• In the U.S., contractors receive 1099 forms and handle their own taxes; subcontractors are paid by the main contractor, who may bear responsibility for their compliance.

• Global classification rules vary significantly—what's legal in the U.S. may trigger employee reclassification in the UK (IR35) or EU (Platform Work Directive).

• Rivermate simplifies global contractor management with flat-rate pricing, compliance in 160+ countries, and human-first support—eliminating misclassification risks for international teams.

Subcontractor vs. contractor: What are the main differences?

Remote work has changed how companies build teams. Instead of hiring full-time employees in every country, many businesses now work with independent contractors and subcontractors to get work done faster and more flexibly.

But here's where it gets tricky: most people use "contractor" and "subcontractor" interchangeably, when they're actually different roles with different legal implications. Get the classification wrong, and you're looking at tax penalties, legal headaches, and potential lawsuits.

This guide shows you the real differences between independent contractors and subcontractors, when to use each type, and how to stay compliant when hiring your first international contractor or scaling a global team.

What is an independent contractor?

An independent contractor is a self-employed professional who provides services directly to a business under a contractual agreement. They manage their own schedules, set their rates, and are responsible for paying their own taxes.

Unlike employees, independent contractors maintain significant autonomy over how they complete their work. This independence is the key legal distinction that determines their classification.

Typical traits of independent contractors

• They operate as separate legal entities or sole proprietors. Most independent contractors run their own businesses, whether as a sole proprietorship, LLC, or corporation. This legal structure reinforces their status as separate from your organisation.

• They control how, when, and where they perform work. Contractors typically work on their own terms, using their own equipment and methods. While you can specify deliverables and deadlines, you generally can't dictate their daily schedule or work processes.

• They issue invoices for services rendered. Rather than receiving a regular paycheck through payroll, independent contractors bill for completed work, often based on project milestones or hourly rates they've set.

• They're not entitled to employee benefits or protections. Contractors don't receive health insurance, retirement contributions, paid time off, or other benefits typically provided to employees. They also aren't covered by employment protections like minimum wage laws or wrongful termination statutes.

What is a subcontractor?

A subcontractor is typically hired by a contractor, not the end client. They handle a specific portion of work that supports the main contract between the client and the contractor.

The subcontractor relationship creates a chain of responsibility: the client contracts with the main contractor, who then engages subcontractors to complete specialized aspects of the project. This model is common in industries like construction, IT services, and creative agencies.

Key characteristics of subcontractors

• They work under another contractor's contract rather than directly with the client. The subcontractor may never communicate with the end client. Their contractual relationship is with the main contractor who hired them.

• They specialize in a subset of the project. Subcontractors typically bring niche expertise—like a construction electrician hired by a general contractor, or a DevOps specialist engaged by a software development agency.

• They're still considered self-employed but have less direct control over the overall project scope. While subcontractors maintain independence in how they complete their specific tasks, the main contractor typically defines what needs to be done and sets the overall project parameters.

• The main contractor remains responsible for the subcontractor's performance. If a subcontractor fails to deliver or creates problems, the main contractor—not the subcontractor—is accountable to the client. This creates an important layer of liability that contractors must manage carefully.

Real-world example

A digital marketing agency (the contractor) signs a $50,000 deal with a fintech startup to deliver a complete website redesign. The agency has in-house designers and project managers, but needs specialized content for financial services compliance.

The agency hires a freelance copywriter with fintech expertise (the subcontractor) to handle all written content. The copywriter works directly with the agency's project manager, never interacts with the fintech client, and invoices the agency—not the end client.

Here, the copywriter is a subcontractor. From the client's perspective, they're working solely with the agency. The agency manages the relationship, approves the work, and takes responsibility for the final deliverables.

Independent contractor vs subcontractor: Key differences explained

While both independent contractors and subcontractors are self-employed, the distinction lies in who they contract with, how they're managed, and where legal responsibility lies.

Understanding these differences is crucial for cross-border payroll management and compliance, especially when engaging talent in multiple countries. Working with the right international payroll provider can help you navigate these complexities.

Aspect	Independent Contractor	Subcontractor
Who they report to	Directly to the client or company	To the main contractor
Work scope	Broader or project-based	Specific component of a larger contract
Control	High autonomy over methods and schedule	Moderate autonomy, directed by contractor
Payment	Paid directly by the client	Paid by the contractor
Legal responsibility	Client manages compliance	Contractor responsible for subcontractor's compliance
Typical industries	Tech, design, consulting, marketing	Construction, manufacturing, agency work
Client relationship	Direct communication and collaboration	Often no direct contact with end client

Table Caption: Independent contractor vs subcontractor: key differences

In short: Every subcontractor is an independent contractor, but not every independent contractor is a subcontractor.

Legal and compliance implications: Avoiding misclassification

Misclassifying an independent contractor or subcontractor as an employee—or failing to clarify their relationship—can trigger serious legal and tax consequences. In 2025, labor authorities worldwide are intensifying enforcement efforts, particularly for companies hiring across borders.

Key areas of risk

• Tax obligations: In the U.S., independent contractors receive a 1099 form, while employees receive a W-2. Subcontractors often issue their own 1099s to the contractor who hired them. Misclassification can result in back taxes, penalties, and interest, potentially costing your company hundreds of thousands of dollars per worker. The IRS provides detailed guidance on determining worker classification.

• Liability exposure: If a subcontractor causes harm, fails to deliver, or violates regulations, the main contractor is typically liable to the client. This creates a chain of responsibility that many companies overlook. You can be held accountable for a subcontractor's actions even if you had no direct oversight of their work.

• Intellectual property (IP) rights: Unless explicitly specified in the contract, IP created by a subcontractor may not automatically belong to the client. In many jurisdictions, the contractor who hired the subcontractor owns the IP by default, not the end client. This can create disputes over ownership of critical assets like code, designs, or content.

• Insurance requirements: Contractors are usually required to verify that subcontractors carry appropriate business insurance, including general liability and professional indemnity coverage. Failing to verify coverage can leave your company exposed if something goes wrong.

• Employment status determination: Globally, classification criteria vary significantly. In the EU, UK, and APAC regions, authorities focus on the economic reality test—examining the degree of control, integration, and dependency—not just the contract terms. A worker who behaves like an employee may be reclassified as one, regardless of what your paperwork says.

Global compliance challenges

When hiring international employees or contractors, the complexity multiplies. Each country has its own tests for determining worker classification:

• United States: The IRS uses a multi-factor test examining behavioral control, financial control, and the relationship type.

• United Kingdom: HMRC applies the IR35 rules to determine "disguised employment." European Union: Countries like Germany and France use dependency tests that can reclassify contractors as employees.

• Australia: The Fair Work Act includes strict definitions around genuine contracting relationships.

These varying standards mean a contractor properly classified in one country might be considered an employee in another. For global companies, maintaining compliance requires understanding local laws and implementing country-specific contracts and management practices.

This is where working with an Employer of Record or Contractor of Record becomes invaluable. These partners ensure your global workforce remains compliant with local labor laws, tax regulations, and classification requirements, whether you're comparing Deel pricing, Remote.com pricing, or other EOR solutions.

Payment, tax, and financial responsibilities

Payment terms and tax obligations differ significantly depending on whether someone is an independent contractor or subcontractor, and these differences have major implications for your finance team.

Independent contractors

• Payment structure: Independent contractors are paid directly by the client. They typically submit invoices based on completed milestones, hourly rates, or project fees outlined in their contract.

• Tax responsibilities: Contractors handle their own income taxes and self-employment contributions (like Social Security and Medicare in the U.S.). They don't have taxes withheld from their payments.

• Reporting requirements: In the U.S., companies must issue Form 1099-NEC to any contractor paid $600 or more annually. Other countries have similar reporting thresholds and requirements.

Subcontractors

• Payment structure: Subcontractors are paid by the contractor, not the end client. The main contractor often marks up the subcontractor's rate when billing the client, creating their profit margin.

• Tax responsibilities: Like independent contractors, subcontractors manage their own taxes. However, the main contractor may need to verify the subcontractor's tax compliance to protect themselves from liability.

• Reporting requirements: The main contractor issues tax forms to their subcontractors. The end client typically has no direct tax reporting obligations to subcontractors.

Global payment considerations

When hiring internationally, payment and tax compliance become significantly more complex. Different countries have varying requirements for:

• Withholding taxes: Some countries require clients to withhold tax from contractor payments, even for independent contractors. VAT/GST obligations: In many countries, contractors must charge value-added tax on their services.

• Currency and cross-border payments: Managing international payroll requires understanding foreign exchange, payment rails, and local banking requirements.

• Tax treaties: Double taxation agreements between countries can affect how contractor income is taxed.

Working with a specialised global payroll partner helps ensure you're meeting all payment and tax obligations across jurisdictions. The right partner can handle contractor payments, tax compliance, and reporting in 160+ countries, reducing your administrative burden and compliance risk—often at more transparent pricing than alternatives like Rippling or Oyster HR.

When to hire a subcontractor vs an independent contractor

Choosing between engaging an independent contractor directly or using a subcontractor depends on your business model, project structure, and risk tolerance. Each approach has distinct advantages.

Use case scenarios

Use Case	Best Fit
You need specialized expertise for a short-term project	Independent contractor
You've already won a large contract and need help delivering parts of it	Subcontractor
You want full control over deliverables and schedule	Independent contractor
You're a contractor scaling operations or working with multiple specialists	Subcontractor
You want to minimize direct liability exposure	Subcontractor (if you're the client working through a contractor)
You need seamless communication and collaboration	Independent contractor

Table title: Choosing between independent contractors and subcontractors: use case guide

Pros of independent contractors

• Greater flexibility and control: When you hire contractors directly, you can communicate your vision, provide feedback, and adjust direction more easily.

• Direct communication with the client: No intermediaries means faster decision-making and clearer expectations.

• Fewer intermediaries: Direct relationships often result in lower costs, as you're not paying a markup to a middleman contractor.

• Clearer accountability: When issues arise, you know exactly who to work with to resolve them.

Pros of subcontractors

• Access to niche expertise: Contractors often have networks of specialized subcontractors they've worked with before, giving you access to vetted talent.

• Scalable for larger contracts: When you win a big project, subcontractors let you scale delivery capacity without hiring full-time employees.

• Shared liability and workload: The main contractor assumes responsibility for managing and quality-checking the subcontractor's work, reducing your oversight burden.

• Built-in quality assurance: Experienced contractors have processes for managing subcontractors, which can result in more consistent quality.

Important consideration

Always define roles clearly in contracts. Ambiguity about whether someone is a contractor or subcontractor increases misclassification risk and erodes trust between parties. Your contracts should explicitly state:

• Who the worker contracts with (client or main contractor)

• Who manages and directs the work

• Who is responsible for deliverables

• How payment flows (directly from client or through contractor)

• Who owns intellectual property rights

• What happens if the relationship ends

Clear documentation protects all parties and creates a foundation for successful working relationships. If you're unsure about contract structures for different countries, country-specific employment guides can help ensure you're meeting local requirements.

How to manage contractors and subcontractors compliantly

Managing external workers demands structure, compliance expertise, and ongoing oversight. Here's how to build a compliant contractor management program.

Best practices for compliance

• Draft clear contracts outlining scope, deliverables, and ownership of IP. Your contracts should specify exactly what work will be performed, by when, and what you'll own when the project is complete. Include termination clauses, confidentiality provisions, and dispute resolution processes.

• Verify classification using local labor guidelines or a compliance partner. Before engaging any contractor or subcontractor, confirm they meet the legal definition in their jurisdiction. Don't rely solely on what they tell you—verify using official government guidelines or work with an expert.

• Use centralized payment platforms to avoid delays and errors. Manual payment processes create compliance risks and administrative headaches. Implement systems that track payments, generate tax forms, and maintain audit trails.

• Track documentation meticulously. Maintain organized records of contracts, invoices, tax forms, proof of insurance, identification documents, and correspondence. In an audit, documentation is your best defense.

• Review regularly—especially as project scopes evolve. Worker classification isn't a one-time decision. As relationships evolve and work patterns change, reassess whether someone remains properly classified. A contractor who initially worked independently might drift into an employee-like relationship over time.

The global complexity challenge

If you work with global teams, compliance requirements multiply exponentially. Each country adds layers of complexity:

• Different classification tests and criteria

• Varying tax and social security obligations

• Unique contract requirements and employment protections

• Local language and currency considerations

• Country-specific data privacy and security regulations

For companies serious about global expansion, trying to manage this complexity internally is risky and resource-intensive. Partnering with an Employer of Record or Contractor of Record like Rivermate helps ensure every engagement is legally defensible and tax-compliant, no matter the country.

These partners handle the complexity of local compliance while you focus on building your business and managing relationships with your team. Understanding the difference between payrolling vs. Employer of Record models can help you choose the right solution for your needs.

Why companies choose Rivermate to manage global independent contractors

At Rivermate, we understand that managing independent contractors and subcontractors across multiple countries is complex, time-consuming, and fraught with compliance risks.

That's why we built a compliance-first global employment platform that simplifies every step of hiring, paying, and managing contractors worldwide.

Stop worrying about misclassification risks, tax penalties, and compliance complexity. Let Rivermate handle the details while you focus on growing your business.

Book a demo today!