A worker is a subcontractor only if they control how the work gets done and run their own business. The IRS looks at three things: behavioral control, financial control and the type of relationship. What the contract or the 1099 says doesn't decide it. If you treat an employee as a subcontractor without a reasonable basis, the IRS can hold your company liable for the employment taxes on that worker. In Georgia, a contractor can also end up responsible for workers' comp benefits owed to a subcontractor's employees.
Most growing contractors have at least one crew that started as a true sub and slowly turned into something else. Same guys every day, your trucks, your schedule, your foreman telling them where to be. That drift is where classification problems come from.
Why this gets harder as you grow
When you're running two or three jobs, classification is easy to see. The drywall company has its own crew, its own insurance and three other GCs it works for. Clearly a sub.
At ten or fifteen jobs, the picture blurs. You've got a framing crew that has worked only for you for four years. A finish carpenter you pay by the hour. A "sub" who drives a company truck and fills out your timesheets. Nobody decided to misclassify anyone. It just happened one convenient arrangement at a time.
The bigger the company, the bigger the exposure, because the tax is calculated per worker and per year. And the larger the payroll you run through 1099s, the more likely it is that an auditor, a state agency or an injured worker eventually asks the question for you.
How the IRS actually decides
The IRS doesn't care what you call someone. It looks at the facts of the relationship and groups the evidence into three categories. These come straight from the IRS's own guidance on independent contractors versus employees.
| Category | The IRS question | What it looks like on a jobsite |
|---|---|---|
| Behavioral control | Does the company control, or have the right to control, what the worker does and how they do it? | Your super sets their hours, tells them the sequence, trains them on your methods, checks their work task by task. |
| Financial control | Are the business parts of the job controlled by the payer? | You supply the tools and materials, pay by the hour instead of by the job, and they can't make or lose money on the work. |
| Type of relationship | Are there written contracts or employee-type benefits, and is the relationship ongoing? | No subcontract, they've worked only for you for years, and their work is the core of what your company sells. |
No single factor settles it. The IRS weighs the whole relationship. But in construction, the pattern that gets companies in trouble is consistent: a crew that works only for you, on your schedule, with your equipment, paid by the hour.
What a real subcontractor looks like
The cleanest subs share a few traits, and it's worth checking your 1099 list against them:
They bid the work. They price a scope, and if they run it well they make money and if they don't, they lose it. They run their own crew. You tell them what needs to be done and by when, not how. They bring their own tools and equipment, and on bigger scopes their own material. They carry their own insurance, general liability and workers' comp, with certificates in your file. They work for other contractors, and they'd still be in business if you disappeared tomorrow.
A worker who checks most of those boxes is probably a sub. One who checks none of them is probably an employee, no matter how the paperwork reads.
What misclassification costs
The IRS is direct about it: if you treat an employee as an independent contractor and you don't have a reasonable basis for doing so, you may be held liable for the employment taxes for that worker. That's the federal piece, and penalties and interest can come on top.
For a construction company, though, the bigger costs often sit outside the IRS.
Workers' comp. Under Georgia's statutory employer rule, O.C.G.A. § 34-9-8, a contractor can be held responsible for workers' comp benefits owed to the employees of its subcontractors. If your "sub" has no coverage and one of their people gets hurt on your job, the claim can land on you. That's why the certificate of insurance in your file matters as much as the 1099.
Your insurance audit. Carriers audit payroll and subcontractor costs every year. Payments to uninsured subs commonly get treated as your payroll for premium purposes, which turns into a bill months after the job closed.
Your job costs. If a crew is really labor, then the true cost of that labor includes payroll taxes and insurance you haven't been pricing. Your bids have been running on a labor rate that isn't real. That's a job costing problem as much as a tax one.
Your bonding. A surety reading your statements wants to see a company that manages its risk. A large, unresolved classification exposure is a contingent liability, and if it comes out in an audit, it comes out of your equity.
If you think some of your crews are on the wrong side
You have options, and the worst one is doing nothing and hoping nobody asks.
Ask the IRS. If a worker's status is genuinely unclear, you can file Form SS-8 and the IRS will issue a determination. It's slow, and it's binding on how the IRS sees that relationship, so it's best for true gray areas.
Use the Voluntary Classification Settlement Program. The VCSP lets a business start treating workers as employees going forward with partial relief from federal employment taxes for past years. To qualify, you need to have consistently treated those workers as nonemployees, filed their Forms 1099 for the previous three years, and not be under an IRS employment tax audit or a Labor Department or state classification audit. You apply on Form 8952, at least 120 days before you want to start treating them as employees.
Restructure the relationship. Sometimes the right answer is to bring a crew onto payroll. Sometimes it's to turn a loose arrangement into a real subcontract, with a scope, a price, their own insurance and their own control of the work. Either way, the change has to be real, not a new form on top of the same arrangement.
What to do this quarter
One: pull every 1099 vendor you paid for labor last year and sort them by total paid. Two: for the top of that list, write down honestly who controls the schedule, who supplies the tools, how they're paid and whether they work for anyone else. Three: make sure every sub on that list has a current certificate of insurance on file, for both general liability and workers' comp. Four: for any crew that looks like employees, decide which path above fits before an audit decides for you.
This review is part of how we handle construction tax planning for growing contractors, and it ties directly into the payroll and job cost work we do as a construction CPA firm in Atlanta.
If you pay subcontractors, those payments and the 1099s that go with them are part of a bigger deduction picture. See tax deductions for contractors, and if you're a sole proprietor or partner yourself, run your numbers in our self-employment tax calculator.