Construction payroll: hiring subcontractors, crew payroll and what it costs

Quick answer: hiring subcontractors and running construction payroll

1099-NEC threshold, 2026 payments

$2,000Up from $600 (IRS, Dec 2026 instructions)

Pennsylvania construction SUTA

10.5924%vs 3.822% for other new employers

Certified payroll on federal jobs

WeeklyForm WH-347, Rev. January 2025

Payroll for 10 crew + 5 subs

$112 to $260 a monthPatriot to Gusto Plus

To hire a subcontractor, confirm the sub runs an independent business (its own tools, crews, other clients, a bid price rather than hourly pay you set), collect a Form W-9 before the first payment, get a certificate of insurance, sign a written subcontract and send a 1099-NEC if you pay the sub $2,000 or more for 2026 work. Then run your own crew through payroll, where construction differs in three costs: a higher state unemployment rate in many states, workers' comp required from the first employee in several states, and weekly certified payroll on prevailing wage jobs.

How to hire subcontractors for construction, step by step

1. Test the relationship before the first job. The IRS weighs behavioral control, financial control and the type of relationship. A sub who sets its own methods, supplies its own tools and crew, can make or lose money on the bid and works for other contractors looks independent. A "sub" who works only for you, on your schedule, at an hourly rate you set looks like an employee.
2. Check your state test too. California and Massachusetts presume a worker is an employee unless all three ABC prongs are met, including that the work is outside the usual course of your business. That prong is hard to meet when a general contractor hires a framer. Illinois uses an ABC test for unemployment insurance and has a construction-specific Employee Classification Act (we could not read its text for this update).
3. Collect a W-9 before you pay. Without a taxpayer ID you must withhold 24% backup withholding on reportable payments, and the 2026 backup withholding threshold is $2,000.
4. Get a certificate of insurance. Ask for workers' comp and general liability certificates naming your company, and ask your carrier how it treats uninsured subcontractors at your policy audit.
5. Sign a written subcontract. Scope, price, schedule, who supplies materials, insurance, and on federal jobs the prevailing wage and certified payroll clauses that flow down to the sub.
6. Report the sub as a new hire where required. Florida, Oregon, Virginia, Ohio, Massachusetts (within 14 days), New Hampshire and Illinois require independent contractor reporting; Colorado asks for it when the contractor gives an SSN.
7. File 1099-NEC by February 1, 2027 for each sub paid $2,000 or more for 2026, to the IRS and to the sub.

The full test with examples is in W-2 employee vs 1099 contractor.

What construction payroll software costs

Two things raise the bill for builders. Crews that cross state lines need multi-state payroll: Gusto Simple does not offer it, Patriot and QuickBooks charge $12 a month per extra state, and OnPay includes it. Field crews need time tracking: Patriot Time and Attendance is $6 + $2 per employee, so $26 more for a 10-person crew; Gusto Plus includes it.

For headcounts above 25 and every add-on fee, see payroll service cost per employee.

Construction payroll providers compared

Ranked by our published payroll scores. Scores come from our scoring method. Payroll services are scored out of 100 on price transparency and cost for 10 employees (25 points), tax filing coverage and guarantee (20), features (20), contract and exit terms (15), support access (10) and documented complaints (10). Scores do not yet include certified payroll support, because no provider publishes it.

1099 or W-2 for your subs: the rules that decide it

• IRS common-law test: no single factor decides. The IRS tells businesses to weigh every factor and document the reasoning (page last reviewed May 19, 2026).
• Section 530 relief: protects a business from federal employment tax on workers it treated as contractors if it filed 1099s consistently, never treated similar workers as employees, and had a reasonable basis. "Long-standing recognized practice of a significant segment of the industry" counts as a basis, which matters in trades where subcontracting is the norm. It covers federal employment tax only, not wage claims or state law.
• Form SS-8: either you or the worker can ask the IRS to decide. The IRS says a determination can take at least six months.
• Federal wage law (FLSA): the 2024 DOL rule is still in the Code of Federal Regulations. A February 27, 2026 proposal would weigh control and opportunity for profit or loss most heavily. It is proposed, not final, as of October 16, 2026.
• State ABC tests: California (AB 5) and Massachusetts apply the strict three-prong test. A worker can be a contractor for the IRS and an employee under state law.

If a worker is reclassified, back FICA, FUTA and state unemployment tax are on you. A worker found to be an employee owes only the employee share of FICA (Form 8919), not self-employment tax. For a crew member who works only for you, payroll is usually the safer route. The cost math is in the employee cost calculator.

Construction SUTA rates: states that charge builders more

New employers in construction pay a higher state unemployment rate in at least 12 states. In North Dakota the gap is $4,040.22 per employee in year one ($4,506.22 at 9.67% vs $466 at 1.00% on a $46,600 wage base). In Pennsylvania it is $677.04 ($1,059.24 vs $382.20).

After two or three years your own claims history sets the rate. Every state's standard 2026 figures are in SUTA rates by state; state pages such as Pennsylvania payroll taxes and Ohio payroll taxes show the full picture with local taxes.

Workers' comp for construction crews

Several states require coverage from the first construction employee even when other businesses get a headcount threshold:

Ohio, Washington, North Dakota and Wyoming run monopolistic state funds, so you buy coverage from the state, not a private carrier. In Wyoming coverage is required for extra-hazardous industries by NAICS class. Texas lets most private employers opt out, but non-subscribers must notify the state.

Premiums are set on payroll by class code, so overstating subs and understating crew wages shows up at audit. Pay-as-you-go policies that bill premium with each payroll can shrink a year-end audit bill; see pay-as-you-go workers' comp and what workers' comp costs.

Prevailing wage jobs and certified payroll

On Davis-Bacon covered federal and federally assisted construction, every contractor and subcontractor submits certified payroll weekly to the contracting agency. Form WH-347 (Rev. January 2025, OMB 1235-0008, expires January 31, 2028) is optional, but the payroll data and a signed Statement of Compliance with identical wording are required. Photocopied or scanned signatures do not count; legally valid electronic signatures do.

The weekly report lists each worker's labor classification (journeyworker or registered apprentice), hours, straight time and overtime rates, fringe benefit credit, payment in lieu of fringes and deductions. Getting it right starts in payroll: you need job codes and classifications on every timecard. Our certified payroll guide walks through the form box by box.

Common construction payroll mistakes

• Paying a full-time crew member on a 1099. In an ABC test state the "usual course of business" prong usually fails for trade work a GC sells.
• Skipping the W-9. Without it you owe 24% backup withholding and still have to file the 1099.
• Budgeting the standard SUTA rate. A new Pennsylvania builder pays 10.5924%, not 3.822%.
• Buying payroll that cannot do certified payroll right before a federal job starts. Confirm WH-347 output during the trial.
• Single-state plans for multi-state crews. Gusto Simple will not run a second state; Patriot and QuickBooks add $12 a month per state.