SBA: Independent Contractors Are Subcontractors

A 1099 independent contractor is a subcontractor–not an employee.

This guidance comes from the SBA’s major new rule on the limitations on subcontracting, in which the SBA responded to public questions about how independent contractors are to be treated.

I’m often asked whether a small business can treat its 1099 independent contractors as “employees” for purposes of meeting the limitations on subcontracting.  My answer has long been, “there is no definitive guidance, but in my view, no–a true independent contractor is a ‘subcontractor of one,’ not an employee.”

Now, the SBA has provided that previously-missing definitive guidance.  In drafting its new rule on subcontracting limits, the SBA received questions from the public regarding how 1099 independent contractors are to be treated.  So the SBA provided some clarify in its final rule:

Work performed by an independent contractor shall be considered a subcontract, and may count toward meeting the applicable limitation on subcontracting where the independent contractor qualifies as a similarly situated entity.

So there you have it: an independent contractor is a subcontractor, not an employee.  That said, an independent contractor may still count toward the prime contractor’s performance of work requirements if the independent contractor qualifies as a “similarly situated” subcontractor.  For more on that concept, see my (rather lengthy) blog post here.