A 1099 worker for your construction business is an independent contractor that has more independence and flexibility than someone that works directly for you. They receive an agreed paid amount but do not receive benefits. Below we will discuss the qualities of an independent contractor in more detail.
It is important to classify your workers correctly. If you misclassify them, then your business may have to pay fines and back taxes.
Independent Contractors and 1099 Workers Defined
According to the IRS, workers are independent contractors when the employer cannot control what will be done and how it will be done. In other words, independent contractors maintain financial, business, and operational control over their work.
Alternatively, an employee is on the company’s payroll. They receive wages and benefits from the company.
The earnings of a worker as an independent contractor are subject to self-employment tax. The employer pays them with no taxes withheld and issues a Form 1099-NEC at the beginning of the next year. Employers are required to issue a Form 1099 if an independent contractor earns at least $600 during the year from the employer.
These are the common law rules the IRS looks at to determine if they are an independent worker or not:
- Behavioral: Does the company control what the worker does and how he or she does the job?
- Financial: Are the business aspects of the worker’s job controlled by the employer? How are they paid? How are expenses paid? What tools are used to do the job, etc.?
- Relationship: Are there written contracts or benefits like retirement, medical benefits, or vacation pay? Will the relationship be ongoing or is the work performed a key aspect of the business?
A Form SS-8 can be filed with the IRS if it is unclear whether a worker is an employee or an independent contractor. The business or the worker can file the form. The IRS will review the information and determine the worker’s status.
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What is a Construction Contractor?
When someone needs construction completed, they may choose to hire a construction contractor to do the work needed. You as the construction contractor would work directly with the client on their needs and negotiate with them about the budget directly.
If you work for a business, they will send you a Form 1099-NEC at the beginning of the next year for the amount they paid you. You will provide invoices to them and you negotiate the contract for the work with them directly.
You may get a large contract and have to hire subcontractors.
What is a Construction Subcontractor?
You will probably be hiring subcontractors if you bid on large projects or need workers who perform specialized functions. You will be the contractor the person or business hires to do the work.
Subcontractors will negotiate with you and walk through the project with you, not the customer. They will have their own contract with you and invoice you for the work they complete. You will send them a Form 1099-NEC at the beginning of the next year.
What Happens If You Misclassify an Employee?
If you hire someone to work for your business but you have them classified wrong, it could be an expensive mistake.
Workers who think they have been improperly classified as an independent contractor can report to the IRS. You will be held liable for back pay for overtime, taxes, and be fined if the IRS determines a worker is misclassified. You will also have to pay for their injuries if they get injured.
You should also review the Department of Labor’s (DOL) factors in determining status.
One problem the DOL mentions is where construction companies hire people as independent contractors when they should be workers. If your workers do not meet the tests for independence, then they should be classified as employees.
It is important to check your state laws too. They may override the common laws and rules above. For example, California has its own laws when it comes to construction contractors.
What are the Benefits of Hiring Independent Contractors or 1099 Workers?
- Flexibility – You have the flexibility to hire workers as needed. You can end the job or start the job when the work is available and do not have to keep them if no work is available. You don’t have to pay employees who aren’t working on the project.
- Benefits – You don’t have to pay them any benefits or make payments for their social security or Medicare taxes. You also do not have to pay unemployment or worker’s compensation for them.
- Relationship – Your relationship with the contractor is easier. If you decide you don’t like the job they are performing, you can end the contract. You don’t have to go through the motion of disciplinary action. Likewise, if you like the job they are doing, you can give them more money to keep them working for you. You don’t have to justify your actions.
What Forms Do You Need for Independent Contractors or 1099 Workers?
Form W-9. A W-9 is the form the 1099 workers or independent contractors will complete to provide you with their tax identification information.
Form 1099-NEC. This was previously called 1099-MISC. As mentioned above, if you pay someone who is not your employee, such as a subcontractor, attorney, or accountant $600 or more for services provided during the year, a Form 1099-NEC needs to be completed. Also, a copy of the 1099-NEC must be provided to the independent contractor by January 31 of the year following payment. You must also send a copy of this form to the IRS by January 31.
Contract. You should have a contract between you and your subcontractor that agrees on the terms such as pay rate and other details. You also may want them to sign a non-disclosure agreement that protects any confidential information of your client and your business.
Invoices. Once you have determined the pay rate and how often they will be paid, ask them to send you an invoice of the hours and the rate paid. You should also let them know when they will receive payment.
Determining the Right Steps for Your Business
It is important to ask yourself these questions when determining what you need for your construction business:
- Do you want to control the worker and the steps they take to complete the project?
- Do you want to determine when they work, what they spend, and ask them to use your equipment?
- Will you want them on ongoing projects long-term?
- Will you give them benefits?
How Do You Manage Your Independent Contractors?
You can still control some things with an independent contractor. For example, you can make sure they are meeting the client’s needs when it comes to details about the job they are doing. You can also encourage good work and address bad work. Again, you can let them go easily if you need to.
You can also request independent contractors to meet with you at certain times and ask them to work at the job site on certain days. You can even use an app like ezClocker to ensure your subcontractors arrive on the job site.
If you are paying them hourly whether they are a subcontractor or an employee, ezClocker makes it easy to know when they are on the job site and when they clock in and out. They can clock in and out from their phone and it has a GPS function so that you can see their locations once they clock in. You can run your construction business anywhere without having to visit the job site to manage your workers.
Conclusion on hiring 1099 workers
Once you know it is time to hire workers and you find out subcontracting works for your business and projects, ensure you hire good workers that represent your brand well. Talk to other contractors for recommendations on good subcontractors. You want to hire subcontractors that have good quality and a great reputation.