Subcontractor vs Employee — The True Cost Math for Remodelers (1099 vs W-2)

The only fair comparison: cost per productive hour

The wrong comparison — sub’s quoted rate vs. employee’s wage — makes subs look expensive every time. The right one prices both sides honestly:

Employee true cost = (wage × burden multiplier) ÷ utilization Sub true cost = quoted rate (+ your markup-able management time)

Step 1 — burden the wage. Payroll taxes, workers’ comp (brutal in the trades — often 5–15% alone), unemployment insurance, liability, PTO, benefits: typically 25–40% on top of wages. The $35/hr carpenter is a $45–55/hr cost before he swings a hammer. Get your exact multiplier from the labor burden calculator or the employee burden calculator, and see trade-by-trade burden rates for benchmarks.

Step 2 — divide by utilization. A sub bills you for work performed. An employee costs 40 hours a week through rain days, gaps between jobs, shop time, and the slow season. At 100% utilization a $50 burdened cost is $50; at 65% (the case study) it’s $77. Utilization is the variable that decides most of these contests, and most contractors have never measured theirs.

Step 3 — now read the sub’s quote. That $68/hr framer carries his own comp, taxes, tools, truck, and idle time inside the rate. Above ~75–80% sustained utilization, your employee usually wins. Below it, you’re paying for hours nobody billed.

What the math doesn’t capture

• Control and schedule. Employees go where today’s problem is; a sub goes where his contract says. When sub scheduling slips cascade through your calendar, that cost is real but invisible in hourly rates.
• Scarcity. With the industry short ~349,000 workers, a good employee is also an option on future capacity — sometimes worth carrying through soft utilization. Just carry the cost knowingly, in overhead, not by pretending it isn’t there.
• Quality consistency vs. specialty depth. Your crew builds your standard; a specialty sub (tile, electrical, HVAC) brings depth you can’t keep busy full-time anyway. Specialty trades are sub work at almost any utilization.
• Markup mechanics. Sub costs pass through your bid with a markup for management and warranty risk — check yours with the subcontractor markup calculator.

The classification trap: you don’t always get a choice

Everything above assumes both options are legal. Often, one isn’t. The IRS common-law test boils down to control:

• Behavioral: Do you set hours, sequence, and methods? Supervise the work directly?
• Financial: Do you provide the tools and materials? Are they barred from profit/loss on the job? Paid by the hour rather than the contract?
• Relationship: Do they work only for you, indefinitely, doing your core business?

Mostly “yes” = that’s an employee, whatever the contract says. And the failure mode is expensive precisely when you can least afford it: back payroll taxes and penalties at audit, or — far worse — a jobsite injury where your “sub” with no comp coverage becomes a claimant against you. A real sub relationship has a written subcontractor agreement, their own insurance certificates on file, their own tools, scope-based pricing, and other clients. If you’re directing a 1099 worker like crew, the cheapest fix is the honest one: put them on payroll and price the burden into your bids.

Bottom line

Run the formula before the debate: burdened cost divided by measured utilization against the sub’s all-in rate. Steady backlog and core trades favor W-2; lumpy volume and specialties favor 1099; and the classification test overrides both whenever you’re really directing the work. The contractors who get this wrong aren’t bad at math — they’re comparing a loaded number to a naked one, and the naked number always lies in the same direction: against your margin.