You’ve got a guy who’s been on your crew for two years. He shows up at 7, drives your truck, uses your tools, and works your jobs. You pay him by the job and send him a 1099 in January.
Here’s the problem. The IRS may not see a subcontractor. It may see an employee.
Worker classification is one of the most common ways trade businesses get into tax trouble. It’s usually not because owners are cutting corners. It’s because “we’ve always done it this way” feels like an answer. It isn’t.
What the IRS Actually Looks At
How you pay someone doesn’t decide it. What they asked for doesn’t decide it. A signed contractor agreement doesn’t decide it either.
The IRS looks at the whole relationship in three areas:
- Behavioral control. Do you control how the work gets done? Setting hours, assigning jobs, and training someone on your methods all point to employee.
- Financial control. Who carries the business side? A true subcontractor has their own tools, truck, and insurance, works for other companies, and can make or lose money on a job.
- The relationship. Is the work ongoing and part of what your business sells? Do you offer benefits? Long-term work on your core jobs looks like employment.
No single factor settles it. The IRS weighs the full picture.
A Quick Gut Check
If this person quit tomorrow, would they have a business, or would they need a new job?
A licensed electrician with his own LLC, his own van, and three other contractors he works for is a subcontractor. A helper who works only for you, on your schedule, with your tools, probably isn’t.
Maryland Adds Another Layer
If you’re in construction or landscaping in Maryland, the state has its own law. The Maryland Workplace Fraud Act presumes a worker is an employee unless you can show otherwise, and it carries fines for each misclassified worker.
Meeting the IRS test doesn’t guarantee you meet Maryland’s.
What Happens If You Get It Wrong
If a worker is reclassified, the bill lands on you, not the worker. That can mean back payroll taxes, penalties, and interest. Unemployment insurance and workers’ comp questions can follow.
One Thing That Did Change in 2026
The 1099 filing threshold went up. For payments made in 2026, you file a 1099-NEC once you pay a contractor $2,000 or more in the year. It used to be $600.
That changes how many forms you file. It doesn’t change who counts as an employee. State rules can also differ, so check with your CPA.
How to Get It Right From Day One
- Get a W-9 and a certificate of insurance from every subcontractor before the first payment.
- Run each worker through the three areas above, and write down why you decided what you did.
- Start with the people who’ve been with you longest. That’s usually where the gray area lives.
- If you’re not sure, ask your CPA before tax season, not during it.
If you find a problem, the IRS has a program that lets businesses fix classification going forward with reduced back taxes. Your CPA can tell you whether you qualify.
You can call him a subcontractor. You can call him Steve. The IRS goes by what the job actually looks like.
Classification is one of the first things I check when I take on a new trade client. If you’ve got a gray-area worker on your crew, let’s talk.
Laura Blunk · White Rabbit Bookkeeping · LauraBlunk.WRB@gmail.com · 512-461-7868
This post is general information, not tax or legal advice. Talk to your CPA about your specific situation.
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