Employees or subcontractors: which should your business use?

As the owner, the choice between hiring employees and using subcontractors is a trade-off between control and cost. Employees you can direct, train, schedule, and rely on day to day, but you carry payroll taxes, workers' comp, and the admin that comes with being an employer. Subs are flexible and low-admin, you just agree a price and file a 1099, but you cannot control how they work, and if you treat a "sub" like an employee the government will reclassify them and bill you for the back taxes and penalties. Most established trade businesses end up using both. The trick is choosing the right one for each kind of work, and never using the sub label just to dodge the cost of an employee. Here is how to decide.‍‌‌‌​‌​​‌​​‌​‌‌​​​​‌‌​​​​‌​​​‌‍

The core trade-off: control versus flexibility

It comes down to one question: how much do you need to direct the work? An employee works how, when, and where you say, with your tools and your methods, which is exactly what you want for your core, ongoing, everyday work and for anyone representing your company to customers. A subcontractor is their own business that you hire for a result. You cannot tell a genuine sub which hours to work or exactly how to do the job, only what the finished work must be. That independence is the point, and it is also the limit.

What an employee gives you, and costs you

An employee gives you control, continuity, and loyalty. You can invest in training, build your own bench of skilled hands, schedule them across jobs, and hold them to your standards and your warranty. The cost is that you become an employer: withholding and payroll taxes, workers' comp, unemployment tax, the I-9 and new-hire reporting, and the payroll burden of roughly 25 to 40 percent on top of the wage. You also carry them through slow weeks, because payroll is due whether the phone rang or not. The full setup is in Taking on your first employee.

What a subcontractor gives you, and costs you

A subcontractor gives you flexibility and a lighter load. You bring them on for a specific job or overflow, agree a price, and when it is done you write a check and file a 1099-NEC at year-end. No withholding, no payroll, and a genuine sub carries their own tools, insurance, and license. That makes subs ideal for specialty work outside your trade, for peaks you cannot staff for permanently, and for testing new volume before you commit to hiring. The costs are real too: you cannot control the details or guarantee their availability next week, their quality is your reputation on the line, and a sub who does bad work can leave you holding the warranty. Protect yourself with the steps below.

The misclassification trap

Here is the line you cannot cross. You do not get to label a worker a subcontractor just because it is cheaper and easier. Whether someone is an employee or a genuine sub is decided by the facts of the working relationship, not by the form you file or what you both agreed to call it. If you control how they work, supply the tools, set their hours, and they work mainly for you, the government treats them as your employee no matter what the paperwork says.

And when a worker is misclassified, the penalties fall on you, the business, not on them. You can be billed for the back payroll taxes you should have withheld and matched, plus interest and penalties, and you can be exposed on the workers' comp side too. The test that decides this, and the durable way to tell which side of the line a worker is on, is in 1099 vs W-2: which are you really. Read it before you set anyone up as a sub. The safe rule: if you need to control the work like an employee, hire them as one.

Protect yourself when you use subs

Using genuine subcontractors is completely legitimate, but do it properly:

• Collect a Form W-9 before you pay them, so you have the information to file their 1099-NEC. No W-9, no check.
• Get proof of their insurance and license. Ask for a certificate of insurance and, where the trade requires it, their license number. A sub without their own coverage can become your problem if they are hurt or cause damage, and in many states a GC can end up owing workers' comp on an uninsured sub. Whether that lands on you routes to Working in Your State.
• Use a written subcontractor agreement that sets the scope, price, schedule, insurance requirements, and who is responsible for what. See Subcontractor agreement essentials.
• File the 1099-NEC for each sub you pay above the reporting threshold for the year. The mechanics are in How to file a 1099-NEC for subcontractors.

A practical way to choose

A simple rule of thumb works for most outfits:

• Steady, core, everyday work that is the heart of your business points to employees, because you want control, consistency, and people you can build up over time.
• Overflow, specialty trades outside your lane, and short bursts of extra volume point to subcontractors, because you want flexibility without the fixed cost.
• A hybrid is normal and healthy. Many contractors run a small permanent crew of employees for their bread-and-butter work and bring in subs for peaks and specialties. Just make sure each person is genuinely on the right side of the classification line.

Common questions

Is it cheaper to use subcontractors than employees?

Often it looks cheaper up front, because you skip payroll taxes, workers' comp, and the payroll burden of roughly 25 to 40 percent that comes with an employee, but the comparison is not that simple. Subs usually charge a higher rate precisely because they cover their own taxes, insurance, and tools, and you give up control and continuity. The real question is not cost alone but which fits the work: steady core work usually justifies an employee, while overflow and specialty work suits a sub. What you must never do is misclassify an employee as a sub to save money, because the back taxes and penalties erase any saving.

Can I just call everyone a 1099 subcontractor to keep it simple?

No. The label does not decide the classification, the facts do. If you control how, when, and where someone works, provide their tools, and they work mainly for you, they are your employee regardless of what form you file or what you both call it. Blanket-labeling your workers as 1099 subs to avoid payroll and comp is exactly what triggers reclassification, and the resulting back taxes, penalties, and interest fall on you, the business. The classification test is covered in 1099 vs W-2. Set people up based on the real relationship.

What do I need to collect from a subcontractor before I pay them?

At a minimum, a completed Form W-9 before the first payment, and ideally a certificate of insurance and their license number where the trade requires one. The W-9 gives you the details to file their 1099-NEC at year-end, and a genuine sub should have their own insurance so that an injury or damage does not become your liability. A written subcontractor agreement setting scope, price, and responsibilities protects you further. In many states a general contractor can owe workers' comp on an uninsured sub, so confirm your state's rule in Working in Your State.

If a worker is misclassified, who gets penalized, me or them?

You, the business, carry the penalties. When a worker who should have been an employee is treated as a 1099 subcontractor, the government pursues the employer for the back payroll taxes that should have been withheld and matched, plus interest and penalties, and there can be workers' comp and unemployment exposure on top. The worker is generally treated as the party the rules protect. That imbalance is deliberate, and it is why the safe move is to classify based on the real working relationship, not on what saves you money. The deciding test is in 1099 vs W-2.

Do I need workers' comp if I only use subcontractors?

Possibly, because in many states a general contractor can be held responsible for workers' comp on a subcontractor who does not carry their own. Genuine, properly insured subs generally cover their own people, which is one reason to demand a certificate of insurance before they start. But if a sub is uninsured, several states push that comp liability up to the GC, and an uninsured sub who gets hurt can become your claim. Whether and how that applies routes to Working in Your State. Always verify a sub's coverage before work begins.

The honest bit

• The classification test itself has shifted at the federal level in recent years and can vary by state, with some states using a stricter ABC test. This guide uses the durable framing and routes the current specifics to 1099 vs W-2 and Working in Your State rather than carding a rule that may change again.
• Whether a GC owes workers' comp on an uninsured sub, the state comp trigger, and any state-level classification penalties all vary by state and route to Working in Your State.
• Payroll burden of 25 to 40 percent is a national planning range, not a fixed figure. Your actual burden depends on your comp class and benefits.
• This is general guidance, not legal or tax advice. If you are unsure which side of the line a worker falls on, or you are already being questioned about it, talk to an employment attorney or CPA in your state before you set the next person up.

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