1099 vs W2 Employee: Which Is Right for Your Construction Business?
In this article, we compare 1099 vs W2 employees, cover rules for classifying employees, and share tips for businesses to ensure compliance.
Last updated: June 9, 2026 5 min read
If you run your own construction business and you need to hire additional workers, there are two directions you can take. You can either hire an in-house worker (also commonly known as a W2 employee) or have the work done by an independent contractor/subcontractor (a 1099 worker).
Classifying your workers properly with the IRS is crucial, as the repercussions can be heavy penalties from the IRS or, in some cases, even a lawsuit against your organization.
Worker classification also has a direct impact on construction business expense management, since the costs of employing a W2 worker, including taxes, insurance, and benefits, are structurally different from what you pay a 1099 contractor.
Legal reasons aside, there are pros and cons to hiring in-house employees (W2 workers) and independent contractors (1099 workers). In this article, we’ll discuss these and also dive deeper into the factors that differentiate a 1099 from a W2 worker.
How to Classify Workers
There are notable distinctions between a W2 employee and a 1099 subcontractor, which go way beyond the filing of taxes. Making the wrong classification can cost you time as well as money. Although figuring out this distinction is straightforward in an office setting, the rules can be hazy for on-field businesses such as construction.
The IRS considers three categories of evidence when they evaluate the employment tax status of a worker, which are based on the way you direct and control them. The three categories are:
- Behavioral Control
- Financial Control
- Your relationship with the employee
These are the federal employment guidelines set by the IRS, mainly for tax purposes. Some states have additional laws regarding the classification of workers for tax and benefits purposes. California passed Assembly Bill 5 (AB5) into law, which has strict instructions for how the construction industry should classify workers.
1. Behavioral Control
According to the IRS, if you have behavioral control over a worker and can dictate to them when, where, and how they are supposed to work, you should probably classify them as a W2 employee.
On the other hand, if the worker owns their own business (a registered business entity), and the nature of your relationship is more of a business-to-client than worker-to-boss, they should be classified as an independent contractor.
Behavioral control can be influenced by scheduling, provided equipment, provided training, and the specific job sector in question.
Scenario Example:
Mario is a plumber who works for a plumbing company, Nintendis Co. His employer needs him to start work at 10 a.m. every morning, and Mario is held accountable for this start time by his employer.
Nintendis Co. supplies all the tools and materials that Mario needs at his job site. Mario also has his own plumbing business on the side, Mario Bros. He uses his own tools for his business, and he purchases the materials he needs for these side projects on his own.
As long as he meets the deadlines of Nintendis Co’s customers, he is free to work for his side business anytime. Mario is an employee of Nintendis Co. and receives a W-2 every year that reports his wages and the amount of tax that Nintendis Inc. withholds from his wages.
However, Mario is a self-employed subcontractor for his side business, Mario Bros. He receives 1099 Forms for almost all of his side jobs, which display the amount he has earned. He must keep documentation of all his income, regardless of whether he received a Form 1099 or not. Mario is also liable to pay his own self-employment tax.
This classification is very straightforward in theory, but it gets complicated in practice.
2. Financial Control
This category deals with whether you, as the employer, have the right to direct and control the financial aspects of the tradesmen’s work. The IRS hasn’t set any specific dollar amount to measure an employer’s financial control over their workers.
Factors of evidence considered under this category include investment, expenses, and opportunity for profit or loss.
Significant Investment
This rule scrutinizes the extent of a worker’s out-of-pocket investment in the project. If the worker is required to own or rent expensive equipment to perform his job, he may be a subcontractor.
Expenses
This rule examines whether or not a worker is reimbursed for large expenses and looks at the amount of the expenses the worker is expected to pay out of pocket.
Generally, if a worker does not have high, unreimbursed expenses, they might be an employee. On the other hand, if they do have high, ongoing expenses that are not reimbursed, they may be a subcontractor.
Opportunity for Profit or Loss
This rule examines the worker’s freedom to make decisions, such as how much inventory to carry or whether to buy or rent equipment, and whether or not these decisions have a direct impact on their profit or loss.
3. Relationship of the Parties
This category of evidence reviews the presence or absence of employee benefits, written contracts, and how the employer and the worker view their relationship.
Employee Benefits
If benefits of any kind are granted to workers, they are most likely W2 employees. These benefits may include health insurance, paid sick days, paid vacation days, workers’ compensation coverage, 401ks, and others.
Written Contracts
By itself, a written contract is not sufficient evidence when it comes to concluding the status of a worker. They may view a contract that describes a worker as a subcontractor as evidence that you intended the relationship to be independent.
Pros and Cons of 1099 vs W2 Workers
Understanding how each worker type contributes to construction labor costs is essential for making that choice strategically rather than purely for short-term savings.
Hiring 1099 workers or independent contractors can help you lower your expenses and legal responsibilities. It would also save you from the tedious paperwork associated with income tax withholdings, employment taxes, and liability for your workers’ behaviors. You won’t be expected to offer benefits to a 1099 worker as well.
However, there are some practical disadvantages to hiring 1099 workers. Independent contractors can control their own hours, and as long as their work is up to the standards you set, they can typically work on their own terms without having to stick to strict company guidelines.
Employer Responsibilities
Your responsibilities when you hire a W2 employee
As the employer, you are required to pay 50% FICA (which is another name for social security and Medicare tax combined) along with FUTA (Federal Unemployment Tax). Your business should issue a W-2 form to the worker, and a copy should be sent to the IRS.
Your responsibilities when you hire a 1099 worker
When you hire a 1099 worker, your responsibilities are far less than when you hire a W2 employee. Generally, you don’t need to withhold taxes when paying an independent contractor. You don’t need to pay FUTA or 50% of FICA. You are also not required to hold workers’ compensation insurance.
Misclassification and Its Penalties
You or your business can garner heavy fines if you misclassify a W2 worker as a 1099 without a “reasonable basis.” If you misclassify a W2 worker as a 1099 contractor, the IRS can penalize you under Section 3509 of the Internal Revenue Code.
The fines depend on whether the misclassification was intended by the employer and, if it wasn’t intentional, whether you filed the correct tax returns.
Record-Keeping Requirements
Every employer under the Fair Labor Standards Act (FLSA) must follow recordkeeping requirements and keep certain records for their nonexempt worker. According to the FLSA, there is no required form for the records. However, the records must include accurate information about the employee and data about the hours worked and the wages earned.
To protect yourself, it always pays to ensure you keep accurate records of your employees’ hours and their project assignments, regardless of whether they are 1099 or W2 workers.
Final Thoughts
Knowing the key differences between 1099 and W-2 employees is crucial for staying legally compliant and managing your workforce effectively. When you fully understand how worker classification works, you can optimize your workforce, minimize costs, and avoid costly legal issues.