Should a contractor hire or subcontract?

Hiring can suit steady work that you need to direct; subcontracting can suit a defined project handled by an independent business. Compare the total cost per productive hour, but check worker classification first: the working relationship determines the rules, not the label on an agreement.

What you call them does not decide it

Paying by invoice instead of paycheck does not make someone a subcontractor. Neither does a signed agreement, or the fact that they asked to be paid that way.

The IRS employment-status test examines three areas:

• Behavioral control. Telling a sub what the finished job must look like is normal. Directing the hours, the sequence, the methods and the training points at employment.
• Financial control. Who owns the tools and the truck? Who absorbs the loss when the job runs long? Does the worker set their own price and work for other people?
• Type of relationship. A defined project with an end, or open-ended work that is central to what you sell?

No single factor decides it. Form SS-8 asks the IRS to rule on an unclear arrangement, but they say that can take six months or more.

That is the federal tax test. The Department of Labor's wage-and-hour analysis is separate. Check the rules and enforcement guidance in effect when you engage the worker; tax classification alone does not settle overtime rights.

State tests also differ by purpose. Under California's ABC test, part B asks whether the work falls outside the hiring business's usual course. A framing business engaging a framer would have difficulty meeting that condition. Certain construction subcontract relationships instead use the Borello test if all statutory requirements are met. Check the applicable test and any exception before relying on independent status.

Getting it wrong can mean back taxes, interest, penalties, unpaid overtime and unemployment contributions, and that bill lands on you.

The real cost of an employee per billable hour

Two things sit on top of a $28 wage: employer costs and time that is paid but not billed. This example allocates a separate reserve for paid leave to each on-duty hour. The billable share below applies only to on-duty time, so leave is not counted twice.

This is a fictional cost example. The assumed wage is $28; employer FICA is 7.65 percent — 6.2 percent Social Security up to an annual wage cap the IRS resets each year, plus 1.45 percent Medicare. The rest are placeholders. Workers' comp especially: it is quoted per $100 of payroll against a class code, clerical sits near the bottom of the scale and roof and structural work near the top, so get a real quote for your own codes.

Unemployment tax is not a flat percentage of every hour, which is how it ends up written down wrong. Federal FUTA is 6.0 percent of the first $7,000 of each worker's wages, and employers who pay their state unemployment tax in full and on time normally take a 5.4 percent credit — giving $42 per employee who reaches the wage base when the full credit applies. Credit-reduction states and other restrictions can raise the amount. State rates and wage bases differ: use your assigned rate and current state guidance, then spread the annual forecast over paid hours for estimating.

The billable share gets skipped most and moves the answer most. Paid time may include driving between sites, loading, shop cleanup and supply runs. Whether you bill it separately is a pricing choice; time that is compensable under wage law still needs to be paid. Seventy-five percent is a guess; if your own timesheets say 60 percent, the same wage costs $57 a billable hour.

The subcontractor comparison, run on the same job

Say a competent sub in your trade invoices you $55 an hour. That looks worse than $45.79 until you write out the week.

The employee budget is $34.34 × 40 = $1,374 for a 40-hour on-duty week, including the leave reserve, even if some hours are idle. Assume the sub bills only productive hours, produces the same output per hour as the employee, and has no travel, minimum or cancellation charge. Change the comparison if your agreement or productivity differs. Sending an hourly employee home early is not free either — state reporting-time rules may apply when a worker reports and receives less work than scheduled; California's rule is one example.

With those numbers the two cross at about 25 billable hours a week. Above that, the employee is cheaper within the available productive hours; below it, the fixed weekly budget costs more than the sub in this example. A slow February inverts the whole thing.

One cost on the sub side never shows on the invoice: a good sub is already booked by other contractors. Compare the availability each arrangement actually commits to.

So look back twelve months at the weeks, not the annual total. Week after week above your crossover point supports a hire. Three good months and a dead winter supports subs — or a mix: a core employee sized to your slowest quarter, subs on top for the peak. Subbing first and hiring second tests the demand before you commit to a weekly cost.

The paperwork behind each

Subcontractor, before the first payment:

• A signed W-9 — legal name, entity type, TIN. A missing or bad TIN can require you to apply backup withholding.
• A written scope for each project: price, schedule, payment terms.
• A certificate of insurance for general liability, sent by their agent or carrier rather than by the sub, plus proof of workers' comp or a valid exemption — in many states an uninsured sub's injury lands on your policy.
• Their trade license, verified with the state board where the work requires one.

At year-end, a 1099-NEC for unincorporated subs you paid at or above the reporting threshold. That threshold moved: $600 for decades, and $2,000 for payments made from January 2026 onward, with inflation adjustments starting in 2027. The form generally goes to the sub and IRS by January 31, or the next business day if it falls on a weekend or legal holiday. Payments to a sub that is a C or S corporation generally are not reported at all — one more reason the W-9 comes first. Use the IRS instructions for Forms 1099-MISC and 1099-NEC for the payment year. Payment-card and qualifying third-party-network transactions are reported by the payment settlement entity, not again by you on Form 1099-NEC.

For an employee, arrange the EIN, required state payroll accounts, insurance and payroll process before work begins. Complete W-4, I-9 and new-hire reporting by their respective deadlines. See first-employee payroll preparation for the sequence, deposits and annual forms.

Workers' compensation requirements depend on state law, headcount and trade. Texas allows most private employers to choose, with exceptions including government projects. Check your own state's rules and the consequences of going without coverage.

Put the new number where the money is decided

Either way, your labor cost per billable hour may change, so recalculate the selling rate. The hire happens, the pricing does not, and the extra capacity turns into revenue with no extra profit. The $45.79 employee figure and $55 subcontractor figure above are costs, not selling prices. Add overhead and profit before saving the selling rate in your DoneQuote catalog, then check the hours and rate in each draft.

Before you commit, take the last three jobs you turned down, price them at your own loaded rate, and see whether the profit left over is worth the fixed cost. If it is not, the answer is not a different hire — it is a higher price.