As your crew grows, so does the paperwork. Misclassifying a worker — or missing a required 1099 — can mean penalties. Here's a plain-English rundown of 1099 subcontractors versus W-2 employees and how to stay clean. (This is general information, not tax or legal advice — confirm specifics with your accountant.)
A W-2 employee works under your direction — you control how, when, and where the work gets done, and you withhold taxes and typically provide tools and benefits. A 1099 subcontractor is an independent business: they control how the work is done, use their own tools, can work for others, and handle their own taxes. Classification is about the actual working relationship, not just what you call it.
If you pay an unincorporated subcontractor $600 or more in a calendar year for services, you're generally required to issue them a Form 1099-NEC and file a copy with the IRS. Payments to corporations are usually exempt, and payments made by card or third-party processor are reported separately (so you typically don't 1099 those).
Before you pay a new sub, get a completed Form W-9 — it gives you their legal name, entity type, and taxpayer ID, everything you need to issue a 1099 later. Collecting it on day one beats chasing it down the following January when you're trying to file.
The January scramble happens when payment records live in a checkbook and a memory. Log what you pay each sub as you go, and year-end totals — and who crossed the $600 threshold — are just a report, not a forensic project. Tracking sub COI (insurance) expiry in the same place keeps uninsured crews off your jobs.
Calling someone a 1099 sub when they function as an employee can expose you to back taxes, penalties, and liability. If you direct their daily work and they depend on you as their primary income, the relationship may legally be employment. When in doubt, ask your accountant.
Generally only to unincorporated subs you paid $600 or more in services during the year, and not for payments made by card (those are reported by the processor). Confirm edge cases with your accountant.
Have each sub complete a Form W-9 before you pay them. It provides the legal name and taxpayer ID you need to issue a 1099-NEC later.
You can owe back payroll taxes plus penalties and interest. Classification depends on the real working relationship — degree of control, independence, and tools — not the label.