Should You Hire Employees or Use 1099 Subcontractors in 2026?

You've got a worker who keeps showing up — same crew, same jobs, week after week — and you've been paying them on a 1099. The business is growing, and the question in front of you is whether that person should go on a W-2 as an employee or stay a 1099 subcontractor. My answer, and I'll defend it below: pick based on control and consistency, not on which one looks cheaper this month. The tax cost is real, but it's the second question. The first one is whether the law already considers this person your employee — because if it does, the label on the invoice doesn't change that. This decision sits inside our broader contractor tax planning approach, and every number below is a 2026 figure.

What's the real difference between an employee and a 1099 subcontractor?

The real difference is who controls the work — not the tax forms, and not what you call the arrangement when you pay them. An employee is someone whose how, when, and where you direct: you set the schedule, you tell them the method, you supply the tools, and the work is ongoing and central to your business. A subcontractor is someone running their own operation who you hire for an outcome: they bring their own crew and gear, they set their own hours, they can take or turn down the job, and they work for other contractors too. That's the control test, and it's the thing the IRS actually weighs. Everything else — the 1099, the W-2, the handshake — is downstream of it.

The tax forms follow from that. If the person is an employee, you put them on a W-2 and run payroll: you withhold their income tax and their half of Social Security and Medicare, and you pay the employer side on top. If they're a genuine subcontractor, you pay the agreed amount and, at year-end, you file a 1099-NEC — the form that reports what you paid a contractor, which the IRS gets a copy of and matches against that person's return. In 2026 you file that 1099-NEC for any sub you paid $2,000 or more during the year. We break the paperwork side down further in our guide on when to give a contractor a 1099, and the classification rules in depth in 1099 vs W-2 for contractors.

Which one is actually cheaper for me?

The 1099 is cheaper on paper, and it's not close. When you put someone on a W-2, the wage is only the starting number. On top of it you owe employer FICA — the employer half of Social Security and Medicare tax — at 7.65% of wages. That's 6.2% for Social Security, which applies up to the $184,500 wage base in 2026, plus 1.45% for Medicare with no cap. The wage base is the income line where the Social Security piece stops. Then you layer on FUTA, the federal unemployment tax, which runs a statutory 6.0% on the first $7,000 of each employee's wages but nets down to 0.6% for most employers who pay their state unemployment on time. That net FUTA works out to $42 per employee per year.

After that come the two costs that vary by where you are and what you do. State unemployment insurance is a state-level tax on the first slice of wages, and the rate depends on your state and your claims history. Workers' compensation — the insurance that covers a hurt worker — is the big one for trades, and it swings from a couple percent of payroll for lighter work to 15% or more for roofing. Add it up and a W-2 hire costs you the wage times roughly 1.0765 before you touch state UI, workers' comp, or a single benefit. A 1099 sub, by contrast, costs you exactly what you pay them. They carry their own 15.3% self-employment tax — the Social Security and Medicare tax a self-employed person pays on their own profit, both halves — out of that check. You owe them nothing on top. We put real dollars on this gap in what a W-2 employee really costs in taxes vs 1099.

Here's the side-by-side on the three things that actually decide it — cost, control, and risk.

So cheaper is easy to name. But cheaper only holds if the 1099 classification is legitimate. If the person is really an employee under the control test, the "savings" is a liability you haven't paid yet — the back employer taxes, plus interest, that surface when someone looks. That's why I won't let a client make this call on price alone.

How do I decide which one my worker should be?

Decide on the business facts, in this order: control, consistency, and growth. Start with control. Do you tell this person how and when the work gets done, or do you hand them a scope and let them run it? If you're directing the method and the schedule, you're describing an employee, and the tax savings of a 1099 aren't yours to take. If they genuinely control the how — their crew, their tools, their sequence — a 1099 fits the facts.

Then consistency. A sub you use for one bathroom remodel and never see again is a clean 1099. A "sub" who's been on your jobs full-time for two years, works only for you, and shows up in your truck is an employee wearing a 1099 label — and that's exactly the drift the IRS looks for. Last, growth. As you scale, permanent crew you rely on daily belongs on W-2, both because the facts point there and because it's easier to build a company on people you can direct, schedule, and train. Specialty trades you pull in for specific scopes — a licensed electrician for the panel, a crane operator for the lift — stay subs. Run each worker through those three, and most of your roster sorts itself.

Once you've made the call, price it. If the answer is W-2, the loaded cost is the cost of doing it right, and you build it into your bids. If the answer is 1099, keep the relationship looking like a real business-to-business arrangement: a signed contract, their own insurance, invoices, and a W-9 on file before the first check. For the crews that make sense as employees, our piece on paying workers the right way instead of cash covers the mechanics of doing payroll cleanly from the start.

What protects me if I keep treating a worker as a 1099?

A safe harbor called Section 530 protects you, if you've earned it. Section 530 comes from the Revenue Act of 1978, and it shields a business from being hit with reclassification liability when it treated workers as contractors, filed their 1099s consistently, and had a reasonable basis for the position. A safe harbor is a set of conditions that, if you meet them, keeps you out of trouble even if the underlying call is later questioned. The point is that a documented, consistent 1099 model is defensible — you don't lose just because the IRS would have drawn the line somewhere else.

The two words that matter in that sentence are "consistent" and "documented." Section 530 rewards a business that has always treated a class of workers the same way and can point to a reasonable basis for it — an industry practice, prior IRS treatment, or professional advice. It does not rescue a business that files 1099s for some workers and W-2s for others doing the same job, or that started calling people subs the month it wanted to cut payroll cost. You can read the relief in the IRS's own words on the Section 530 relief page. The lesson for a growing contractor: if you're going to run a 1099 model, run it cleanly and the same way every time, because that consistency is the thing that protects you.

What if I've been 1099-ing someone who should be on a W-2?

If your history is 1099 and the honest answer is now W-2, the cleanest way across is the IRS's Voluntary Classification Settlement Program — the VCSP. This is the roughly 1% off-ramp for classification drift. Under the VCSP, you reclassify those workers as employees going forward and pay about 1% of one year's compensation for them — no interest, no penalties, and no employment-tax audit of the prior years for those workers. In plain terms: you fix it looking forward, you pay a small toll, and the back years don't blow up on you.

You qualify if you've filed those workers' 1099s consistently and you aren't currently under an employment-tax audit — you apply on Form 8952. The reason this matters for the hire-vs-sub decision is that it removes the trap most contractors feel. A lot of owners keep miscalling workers as subs because coming clean feels like it invites a bill for every prior year. The VCSP is the answer to that fear: make the classification call on the business facts — control, consistency, growth — and if the facts say W-2 while your paperwork says 1099, the VCSP is how you cross over without paying for the past. The full terms are on the IRS VCSP page.

Put the two protections together and the picture is calm, not scary. Section 530 defends a consistent 1099 model you had good reason to run. The VCSP gives you a low-cost, prospective fix if you've drifted and need to move workers onto payroll. Between them, an honest contractor has a defensible position either way — provided the label matches the facts.

What's the bottom line on hiring versus subbing?

Make the call on control, consistency, and growth first, then let the cost math tell you how to price it. If you direct the work, rely on the person day in and day out, and expect that to continue as you grow, they're a W-2 employee — and the 7.65% employer FICA, the FUTA, the state UI, and the workers' comp are the cost of doing it right. If the worker runs their own operation, brings their own gear, sets their own schedule, and serves other contractors, a 1099 is the correct call and the savings are legitimately yours. Keep that 1099 model consistent and documented so Section 530 has your back. And if you look at your crew honestly and realize some of them should have been on payroll all along, the VCSP is a roughly 1% door out — not a reason to keep the label wrong.

Not sure whether your crew should be on W-2 or staying on 1099 — and worried about the years you've already run? We map each worker against the control test, price the loaded W-2 cost for your trade and state, and if you've drifted, we walk you through the VCSP so the move is clean. Book a meeting with our team here.