1099 Subs or W-2 Crew? What It Changes in the Books

Updated 2026-10

The question is about control, not paperwork

A 1099 form does not make someone a subcontractor. The federal test looks at who controls the work: whether you set the hours, supply the tools, direct how the job is done, and whether the person works for others. Several states apply a stricter "ABC" test under which a worker is an employee unless they are free from your control, do work outside your usual business, and run an independent trade. A framer who works only for you, on your schedule, with your tools, is an employee under most tests whatever the invoice says. This page is about what the books carry for each; the classification itself is a question for your tax preparer or an employment attorney.

What a genuine sub looks like in the books

• A W-9 on file before the first payment, with the sub’s legal name and tax ID
• A signed contract or proposal, so the committed cost is known and posted to the job
• Invoices from the sub, paid as accounts payable, posted to the job and cost code
• A certificate of insurance on file; without it, your workers’ comp carrier may charge you for their payroll at audit
• Lien waivers matched to payments on jobs where that applies
• A 1099-NEC in January if payments reached the reporting threshold

The 1099-NEC threshold is $2,000 for payments made in 2026 and after, indexed for inflation from there; it was $600 through 2025. Payments by credit card or through a payment processor are reported by the processor instead, which is a detail that trips up companies paying subs by card.

What a W-2 employee looks like in the books

• Payroll run on schedule, with federal and state withholding, in every state where they work
• Employer payroll taxes and workers’ comp premium, which together with benefits form the labour burden
• Hours posted to jobs at the burdened rate, so the job cost report carries the real cost
• Overtime, including daily overtime where a state requires it, and blended rates when someone works at two pay rates
• W-2s in January, and the workers’ comp audit package when the carrier asks

What each actually costs

A sub quoting $45 an hour costs $45 an hour, plus the risk that they are later reclassified. An employee at $30 an hour costs $30 plus the burden: employer Social Security and Medicare, federal and state unemployment, workers’ comp at the trade’s class rate, and any benefits. In construction that lands between roughly $36 and $42 depending on the class code and the state.

The point is not that one is cheaper. It is that the two are not comparable until the burden is in the books. A job cost report that shows subs at their invoice and employees at bare wages makes employees look cheap and subs look dear, and leads to decisions made on the wrong number.

Why misclassification is expensive

Back payroll taxes with penalties and interest, back workers’ comp premium at audit, state unemployment assessments, and in some states penalties per misclassified worker. Workers’ comp is the one that bites first and most often: at the annual audit the carrier asks for every payment to uninsured subs and charges premium on it as if it were your payroll. A certificate of insurance on file for each sub is what prevents that, and it is a bookkeeping task.

The mixed crew

Most small contractors run both: a core W-2 crew and subs for trades they do not carry. The books handle that without difficulty as long as each person is consistently one or the other. The arrangement to avoid is the same person as a sub in March and on payroll in June, which is both a classification red flag and a reconciliation headache.

What the bookkeeper does, and does not

Collects W-9s and certificates, tracks sub payments and prepares 1099-NECs; runs payroll and keeps the workers’ comp records; posts both to jobs at their real cost. Flags the sub who looks like an employee so you can take advice. Does not decide the classification, which belongs with your tax preparer or attorney and depends on your state.

Where to go next

• Construction payroll services
• Certified payroll and Davis-Bacon, explained
• Bookkeeping for roofers, where crews are usually subs