What is the role of a Prime and Subcontractor in business?
The prime - Contractor is a person or an entity who subcontracts to another person or an entity to perform specific job, whereas a Sub-Contractor is a person or entity who will be assigned a specific project by a prime-contractor to perform. A subcontractor is a person or an entity who does not work under the supervision and uses own tools and tent.
There are many benefits of retaining a subcontractor rather than hiring an employee. Many companies now prefer retaining subcontractor rather than hiring an employee to avoid tax complications, stampede cost, and bearing liabilities.
Functions of a subcontractor:
- Prime company pays one flat fee to a subcontractor rather than withholding taxes and leverage the cost by lucrative perks rather level it by reducing cost.
- A subcontractor does withhold own taxes based on the income.
- Prime contractor does not maintain insurance liabilities for subcontractor rather subcontractor buy own policies.
- The prime contractor is different from a subcontractor. Prime contractor originates project, whereas a subcontractor negotiates with prime contractors to pursue a project.
- Both prime-contractor and sub-contractor can either be an entity or a person.
- An engagement letter is required between prime contractor and a subcontractor.
What information does a prime contractor need from a subcontractor to engage in a project to start?
Generally, a subcontractor provides following information:
- Form W9
- Name of the contact person
- Subcontractor given name or assumed entity’s name
- Complete business and mailing address
- Engagement letter between the prime contractor and subcontractor
- Social security of a person or the federal identification number of an entity
How does a subcontractor activity record in accounting ledgers?
Subcontractor compensation is recorded an expense in the income statement. Prime contractor issues a form 1099 to a subcontractor and report to the Internal Revenue Services. If the contract was assigned to a person rather than an entity form 1099 is issued. If the project was assigned to an entity form 1099 is not required to issue because it is already accounted in a subcontract’s accounting ledger.
Reconciliation of subcontractor aging report
Every account which is included in general ledger along with payer and payee names must be reconciled. A subcontractor activity report is sent subcontractor to verify the activities prior reporting the Internal Revenue Services.
