Should construction workers be classified as 1099 contractors or W2 employees?
Why are construction workers classified as W-2 employees instead of 1099 contractors?
In most industries, short-term project-based workers may be classified as 1099 contractors. In construction however, state and federal regulatory bodies mandate that construction firms classify even temporary workers as W-2's. At first glance it seems counterintuitive, and it definitely presents a challenge for construction firms employing craft workers, namely that W-2 employees are inherently more expensive than 1099 contractors.
Short-term work is a law of gravity in the industry since firms work on projects that have definite start and end dates, which creates varying needs for labor. So if short-term labor is the norm, then workers should be classified as 1099 contractors, right?
Well, not according to guidance from the IRS on how firms should determine if an individual should be classified as an employee or not.
"A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised."
So even for short-term, temporary labor in construction, classifying your worker as a W-2 is necessary. As evidence for how seriously regulators take proper worker classification, it's worth noting that the Attorney General of Washington D.C. launched a campaign against construction firms who misclassify workers as 1099 contractors instead of W-2 employees (Source: Office of the Attorney General for the District of Columbia).
Why are W-2 employees more expensive than 1099 contractors in construction?
Here are some of the reasons why W-2 employees are more expensive than 1099 contractors:
- Firms must calculate and withhold payroll taxes for W-2 employees, which if done in-house creates HR overhead. This can be a cost burden for small to midsized construction firms.
- Construction firms in Texas are required to pay State and Federal Unemployment Taxes (SUTA and FUTA) which increase for firms as employee turnover increases (see our article on employee turnover in construction).
- Firms must also pay a 7.65% FICA tax (or taxes that go towards Social Security and Medicare benefits) for W-2 employees.
- Other HR costs including healthcare coverage, vacation days, and overtime costs also contribute to direct and indirect costs of W-2 construction labor.
All in all, having to treat construction workers as W-2 employees comes with several direct (e.g. benefits and taxes) and indirect costs (e.g. needing to hire internal HR personal) that 1099's don't require, but firms are wise to ensure that workers on their jobsite are classified as W-2 employees nonetheless.