By Katie Robinette, CFO and Cofounder, Evermore Accounting & Coaching

A roofer told me once that his whole crew was 1099. Six guys, all of them on his schedule five days a week, all riding in his truck, all using his equipment, none of them working for anyone else.

He was not trying to cheat anybody. Someone had told him years earlier that this was how it was done in roofing, and he had never had a reason to question it.

That is a misclassification problem, and it is one of the more expensive mistakes a trades business can make, because the bill arrives all at once and it arrives with interest.

Let me explain how the line actually gets drawn.

The question is control

Strip away everything else and classification comes down to one idea. Do you control how the work gets done, or only what the result needs to be?

The IRS looks at this across three broad categories, and no single factor decides it. They weigh the whole picture.

Behavioral control. Do you set their hours? Tell them where to be and when? Direct the sequence of the work? Train them in your methods? Supervise how they do the job rather than just checking the finished product? The more yes answers, the more this looks like an employee.

Financial control. Do they have money invested in their own tools and equipment? Can they take a loss on a job? Do they set their own price? Do they work for other companies? A real subcontractor has a business that can succeed or fail independently of yours.

Relationships. Is there a written agreement? Do you provide benefits? Is the arrangement ongoing and indefinite, or project by project? Is their work the core of what your company does?

That last one matters more than people expect. If you are a roofing company and the person is roofing, it is harder to argue they are outside your regular business than if you hired someone to redo your website.

What a real subcontractor looks like

The clearest way to think about it. A genuine sub:

• Has their own business entity, or at least their own business identity
• Carries their own general liability insurance and workers compensation
• Owns their own tools and usually their own truck
• Works for other contractors, not just you
• Bids or quotes a price for a scope of work rather than being paid by the hour on your schedule
• Sends you an invoice
• Decides how to complete the work and can send someone else to do it

If the person you are paying does not meet most of that, calling them a 1099 does not make them one. The label follows the facts, not the other way around.

What it costs when it goes wrong

This is the part that gets people's attention.

If a worker is reclassified as an employee, you can be on the hook for the employer's share of payroll taxes you never paid, the income tax withholding you never withheld, penalties, and interest running from the date the wages were paid.

Then there is workers' compensation, which is separate and often worse. If an uninsured worker you treated as a sub gets hurt on your site, you may find yourself personally exposed for the injury, and your general liability carrier may take the position that they do not cover it.

There is also a state layer. Ohio has its own tests and its own enforcement, and unemployment claims are a common way misclassification comes to light. A worker you let go files for unemployment, the state looks at the relationship, and now you have an audit you did not ask for.

Add the state and federal exposure together across six workers over three years, and you are looking at a number that ends businesses.

If you do use subs, protect yourself

Legitimate subcontracting is normal and healthy in the trades. Just paper it properly.

Before the first check goes out, collect:

• A signed W9
• A certificate of insurance showing general liability, with your company listed as certificate holder
• Proof of workers compensation coverage, or a valid exemption
• A written agreement describing the scope, the price, and the fact that they control the means and methods
• Their business license or registration where the trade requires one

Then keep the COI current. Insurance lapses, and a certificate from fourteen months ago protects nobody.

At year end, you file a 1099 NEC for any unincorporated sub you paid $600 or more during the year. Getting the W9 up front is what makes January easy. Chasing tax identification numbers in January for someone who worked for you in April is a miserable way to spend a week, and I have watched a lot of owners do it.

The gray area that trips up growing companies

The place I see honest confusion most often is the guy who started as a real sub and slowly became an employee.

He came on for one job, with his own tools, at his own price. That went well, so you used him again. Then he was there every week. Then you started telling him where to be Monday morning. Then he stopped taking other work because you kept him busy.

Nothing about that progression is dishonest. It is just how relationships evolve when they work. But the classification should have changed somewhere along the way, and it usually does not, because nobody was watching for the moment.

If you have someone who has been with you every week for a year, take an honest look at that relationship. It is much cheaper to fix it going forward than to have it fixed for you.

Where to start

Make a list of everyone you paid last year who was not on payroll. For each one, ask whether you controlled how the work got done and whether they had a real business outside of you.

If any of those answers make you uncomfortable, that is worth a conversation before it becomes a notice.

This is a normal thing to get wrong and a very solvable thing to correct. We work through this with trades clients regularly, and the fix is almost always less painful than the worry that preceded it.

This article is general information, not advice on your specific situation. Classification depends on the full facts of each working relationship.