My first year in business I was drowning in work. I had a three-week backlog and was turning away jobs daily. So I asked my buddy Mike — also a handyman — to help me out on a big deck job. I paid him $300 cash at the end of the day, did not think twice about it, and moved on. At tax time my accountant asked me about it and I learned I had technically broken about four laws. The IRS does not care if it was "just one time" or "just helping out." If you pay someone to do work for you, you need to do it right.
The Legal Difference
The IRS uses a multi-factor test to determine whether someone is an employee or an independent contractor. The core question is control: do you control what the worker does and how they do it?
Subcontractor (1099): They control how the work gets done. They use their own tools. They set their own schedule. They can work for other clients. They invoice you. You do not provide training, and you do not set their hours. They are running their own business and you are one of their clients.
Employee (W-2): You control how the work gets done. You provide tools and training. You set their schedule. You can direct their methods. They work primarily or exclusively for you. You withhold taxes from their pay.
This distinction matters enormously because misclassifying an employee as a subcontractor triggers IRS penalties, back taxes, and potential lawsuits. The penalties include the employer's share of FICA taxes (7.65 percent of all wages paid), plus interest, plus potential fines of $50 per misclassified W-2. State penalties vary and can be even steeper.
Subcontractors: Pros and Cons
Pros:
- No payroll taxes (they handle their own self-employment tax)
- No workers' comp requirement in most states (but verify — some states require it even for subs)
- No benefits obligations (health insurance, PTO, retirement)
- Flexible — use them when you need them, do not pay when you do not
- Simpler paperwork — just a 1099 at year-end if you pay them $600+
Cons:
- Less control over quality and methods
- They can decline work or prioritize other clients
- Liability risk — if they are not insured and something goes wrong on your job, you may be on the hook
- Misclassification risk if the IRS determines they are actually employees
Subcontractors work best when you need help on specific projects — a deck build, a bathroom remodel, a large painting job. You bring them on for that project, they do their part, you pay them, done.
Employees: Pros and Cons
Pros:
- Full control over schedule, methods, and quality standards
- Consistent availability — they work for you, not for whoever offers the best gig today
- You can train them in your processes and build a team culture
- Customers interact with a consistent person, which builds trust
- Legal clarity — no misclassification risk
Cons:
- Payroll taxes add 7.65 percent to their cost (employer FICA share)
- Workers' comp insurance: $3-15 per $100 of payroll for trades, depending on state and classification
- Payroll processing: $40-100/month through a service like Gusto or ADP
- Unemployment insurance contributions
- You pay them regardless of job volume — slow weeks still have labor costs
- More paperwork and compliance requirements
The Real Cost Comparison
Let's say you want to put someone in the field at $25/hour. Here is what it actually costs:
As a subcontractor: $25/hour. That is it. They handle their own taxes, insurance, and tools. Your cost is exactly what you pay them. But remember — a good sub charges $35-50/hour because they are covering all those costs themselves. If you find someone willing to work as a "sub" for $25/hour, they are almost certainly an employee by IRS standards.
As an employee: $25/hour base wage + $1.91/hour employer FICA + workers' comp (roughly $2-4/hour for trades) + unemployment insurance ($0.50-1.50/hour) + payroll processing ($0.25-0.50/hour) = approximately $30-32/hour total cost. That is 20-28 percent above the base wage.
The subcontractor looks cheaper, but only if they are legitimately an independent contractor. If you are telling a "subcontractor" when to show up, giving them your tools, and they work exclusively for you — you have an employee regardless of what your agreement says, and the IRS will treat them as one.
Which One Is Right for You?
If you need occasional help on big projects and the person genuinely runs their own business: subcontractor.
If you want someone showing up at your shop every morning, riding in your truck, using your tools, and working your schedule: employee.
If you are grossing $150,000+ per year as a solo operator and consistently turning away work, it is probably time for an employee. The cost of an employee at $30-32/hour is easily recouped if they are generating $70-85/hour in billed work. That is $40-50/hour in gross profit per employee hour — enough to cover their full cost and add significantly to your bottom line.
Getting Started With Your First Hire
Whether you go sub or employee, start with one person on a trial basis. For a subcontractor, do two or three projects together before committing to a regular arrangement. For an employee, many states allow a 90-day probationary period. Use that time to evaluate their skill, reliability, customer interaction, and work ethic.
Document everything. Written agreements for subcontractors spelling out that they are independent, use their own tools, set their own methods, and work for other clients. Employment agreements for employees covering pay rate, schedule, responsibilities, and termination terms. These documents protect both sides and set clear expectations from day one.