In the construction industry, using independent contractors is common — in fact, it’s often essential to getting projects done efficiently. But that also means construction businesses face greater scrutiny when it comes to worker classification. And if a worker is incorrectly classified as an independent contractor instead of an employee, the consequences can get expensive — fast.
Back taxes. Penalties. Wage claims. Workers’ compensation liability.
It all adds up — and many business owners don’t realize they’re exposed.
So how do you determine whether someone is an employee or an independent contractor?
The IRS groups the key factors into three main categories:
- Behavioral Control
- Financial Control
- The Overall Relationship Between the Parties
Here’s what those mean in real-world construction terms.
Behavioral Control — Who Directs the Work?
This category looks at how much direction and oversight the company has over the worker.
How was the job obtained?
Independent Contractor
- Submits a bid or estimate
- Determines pricing and potential profit
- Chooses which jobs to accept
Employee
- Applies for a job posting
- Is interviewed and hired
- Pay rate is established by the employer (even if negotiated)
Who controls how the work gets done?
Independent Contractor
- Chooses the method, tools, labor, and approach
- Can hire and supervise their own workers
- May work for other clients at the same time
Employee
- Follows the employer’s methods and procedures
- Receives training and supervision
- Must comply with company policies
- Often must seek approval to work elsewhere
Who sets the schedule?
Independent Contractor
- Negotiates work time and deadlines with the client
Employee
- Works during the company’s established hours
- Follows a set or expected schedule
Financial Control — Who Bears the Financial Risk?
This factor focuses on investment in the business.
Who provides tools and equipment?
Independent Contractor
- Purchases and maintains their own tools and equipment
- Typically owns significant business assets, not just hand tools
- Incurs recurring business expenses like rent, payroll, fuel, or insurance
- Has a real opportunity to profit — or lose money
Employee
- Uses tools and equipment provided by the employer
- Does not personally absorb business expenses
- Receives wages for work performed
Who pays job-related expenses?
Independent Contractor
- Covers their own project costs
- Typically isn’t reimbursed
Employee
- Is usually reimbursed or uses a company card
- Still submits receipts or documentation
Does the worker market their services to the public?
Independent contractors generally:
- Advertise
- Maintain a website or listing
- Operate under a business name
- Work with multiple customers
These all signal a separate business operation.
The Overall Relationship — What Was Intended?
The IRS also looks beyond daily work activities to the nature of the relationship.
Are benefits provided?
If the worker receives:
- PTO
- Bonuses
- Company insurance coverage
- Other employee-type benefits
They are very likely an employee.
Contractors don’t receive employer-provided benefits because they run their own business.
Is the work a key part of your business?
This is an important question — especially in construction.
If the worker is performing your core business services, that leans toward employee status.
If the work is outside your normal operations, contractor status may apply.
Example — Employee
A site laborer working under your foreman’s direction = likely employee
Example — Contractor
An outside IT consultant installing accounting software = likely contractor
How permanent is the relationship?
Employees may be:
✔ Full-time
✔ Part-time
✔ Seasonal
✔ On-call
Contractors are generally engaged project-by-project.
And one important reminder:
Simply issuing a Form 1099 does NOT make someone an independent contractor.
Why Worker Classification Matters
Getting it wrong can lead to:
- Federal and state tax assessments
- Penalties and interest
- Wage and hour claims
- Workers’ compensation issues
- Reputational risk
Construction is already a higher-risk industry — which means getting ahead of compliance is key.
Final Thoughts
When in doubt, ask yourself:
- Who controls how the work is done?
- Who bears the financial risk?
- Does the worker truly operate an independent business?
If you aren’t sure — you’re not alone. Worker classification rules can be complex, especially when multiple subcontractors are involved.
We’re Here to Help
Our team works closely with construction companies to help evaluate worker relationships, reduce audit risk, and keep your business in compliance — while still giving you the flexibility you need to operate effectively.
If you’d like to talk through your situation, we’re here for you. Contact us today!
