1099 or W-2? Classifying the people who work for you

Calling someone a subcontractor does not make them one. Neither does having them sign something that says they are, or paying them by invoice, or the fact that they asked to be paid that way.

Worker classification is decided by how the working relationship actually functions. If it functions like employment, it is employment, whatever the paperwork says.

The question underneath all of it: who has control

The test comes down to control, looked at from three directions.

Behavioural control. Do you decide how the work gets done, not just what the result should be? Do you set their hours, tell them the order to do things in, supervise the method, train them in your way of working? That points to employee.

Financial control. Do they have a real chance of profit or loss? Do they supply their own tools and vehicle, carry their own insurance, cover their own costs? Can they take work from other companies? Someone who works only for you, in your van, with your tools, has no independent business.

The relationship itself. Is it open-ended or tied to a defined project? Are they doing work that is central to what you sell — a roofer roofing for a roofing company — or something peripheral?

No single answer settles it. It is the overall picture.

The patterns that get contractors caught

A few situations come up again and again in the trades:

The long-term helper. Someone who started as a sub for one job and has now been with you full-time for two years, working your hours, using your tools. Whatever you call him, he functions as an employee.

The apprentice. By definition you are training them in how to do the work. Training is behavioural control.

The sub who only works for you. Independence is central to being independent. Someone with no other customers is not running a business.

Paying a crew through one man. He invoices you and pays the others in cash. That does not remove the relationship, it just adds a layer, and it tends to look worse rather than better when examined.

By contrast, a licensed sub with his own crew, his own truck, his own insurance, who bids your job and three others this month, is a subcontractor by any reading.

What getting it wrong costs

Reclassification is not a small correction. You can be liable for the payroll taxes that should have been withheld — both halves — plus penalties and interest, going back across the period.

The larger exposure is often workers compensation. If someone you treated as a sub is injured and is later held to be an employee, your carrier may decline the claim, and that is the kind of number that closes a business rather than dents it.

State rules can also be stricter than federal ones, and several states apply tighter tests than the IRS does. Being comfortable federally does not automatically mean you are comfortable in your state.

The records to keep for genuine subs

For anyone you are treating as a subcontractor, hold:

• A W-9 before you pay them the first dollar, not in January
• A certificate of insurance, current, with expiry tracked
• Their licence number, where the trade requires one
• A written agreement describing the scope and result, not the method
• Their invoices, showing they billed you rather than being paid a wage

That file is what makes the case if it is ever questioned.

The January problem

You must issue a 1099-NEC to any unincorporated subcontractor you paid $600 or more in a calendar year. The scramble happens because nobody tracked payments by payee across the year, or collected W-9s at the time.

Both are trivial to handle monthly and painful to reconstruct in January. Tracking payee totals through the year, and flagging anyone approaching the threshold without a W-9 on file, is part of a proper monthly close — see the year-end checklist.

If you think you have got it wrong

Do not simply switch someone to W-2 and hope the previous period goes unnoticed. There are voluntary programmes for reclassifying workers on better terms than an examination would produce, and the sensible move is a conversation with your CPA about which applies before anything changes.

This is general information about how classification works, not legal or tax advice. The determination depends on your specific facts and on your state — get it reviewed properly.