Employee or subcontractor? How to classify your crew in 2026

Paying helpers on a 1099 appears cheaper because it avoids payroll tax, workers' comp, and benefits. It is also the single most common audit problem for trade businesses, and it tends to surface at the worst moment, when a worker is injured or files for unemployment.

The federal test: who controls the work

The IRS looks at three categories of evidence:

• Behavioral control covers whether you tell workers when, where, and how to do the work, and whether you train them.
• Financial control looks at whether they have their own tools, truck, insurance, and other customers, and whether they can make or lose money on a job.
• The relationship category asks whether there is a written contract, benefits, or an expectation of ongoing work, and whether the work is a key part of your business.

No single factor is decisive. A licensed electrical sub who bids jobs, carries insurance, and works for five GCs is a contractor. By contrast, an apprentice who shows up at your shop at 7 a.m. and rides in your van is an employee.

State ABC tests are stricter

In states such as California, Massachusetts, and New Jersey, a worker is presumed an employee unless all three of the following are true:

1. A: The worker is free from your control and direction.
2. B: The work is outside the usual course of your business.
3. C: The worker is customarily engaged in an independently established trade.

Prong B causes the most trouble for the trades, because a plumbing company hiring a plumber usually fails it. California carves out construction subcontractors. If the subcontract is in writing and the sub holds a CSLB license for the work, has its own business license and location, carries its own insurance, and meets the statute's other conditions, the looser Borello test applies instead. In New Jersey, prong B can also be met if the work is done outside all of your places of business, though a job site where your business does its core work may count as one.

In Connecticut

Connecticut applies an ABC test for unemployment insurance, and its prong B, like New Jersey's, can also be met by work done outside all of your places of business. The 2026 taxable wage base is $27,000 per employee. The state also wants a copy of each Form 1099-NEC you issue to a Connecticut resident, or to a nonresident for work done in Connecticut. The Connecticut contractor guide covers those filings.

Key numbers: Form 1099-NEC threshold rises to $2,000 for payments made in 2026, indexed from 2027 · 2026 forms due February 1, 2027 · employer FICA of 7.65%, with the 6.2% Social Security portion ending at the $184,500 wage base.

The new 1099 threshold

Starting with payments made in 2026, you need to issue Form 1099-NEC only to a payee you paid $2,000 or more during the year, up from the long-standing $600. The higher threshold reduces paperwork, but it does not change who is an employee. You should still collect W-9s from everyone.

What misclassification costs

If the IRS reclassifies workers, you can owe the employer share of FICA, a percentage of the employee share and income tax you should have withheld, federal unemployment tax, and penalties and interest. States add unemployment insurance, workers' comp premiums, and wage-and-hour claims. The Voluntary Classification Settlement Program can limit federal exposure if you correct the problem proactively.

A worked example

A roofing company pays six helpers $45,000 each on 1099s. Reclassification exposure for one year starts with employer FICA of roughly $20,650, plus a share of income tax withholding, FUTA, state unemployment, and workers' comp. Across three open years, the total can easily exceed $100,000 before penalties.

Common mistakes

1. Treating a signed independent contractor agreement as settling the question, which it doesn't.
2. Paying the same person on both a W-2 and a 1099 for similar work.
3. Not checking subcontractors' licenses and certificates of insurance.
4. Forgetting that some states require new-hire or 1099 filings at lower thresholds than the IRS.

How Summer Associates helps

Summer Associates' construction and trades team reviews how each worker is paid, flags risky arrangements, and helps you move people to payroll affordably, including an evaluation of the Voluntary Classification Settlement Program.

This guide is general education based on federal and Connecticut law as of 2026-11-15. State rules differ and facts matter. Before acting, get advice for your situation from Summer Associates or another qualified advisor.