Payroll & Subcontractor Payment Processing

Common codes include: 5403 (carpentry), 5437 (electrical work), 5551 (plumbing), 5645 (painting), and 9012 (clerical). Use the most specific code for each employee's primary duties. Incorrect codes can result in significant premium adjustments during audits.

Track hours by job site daily and allocate payroll costs accordingly in your accounting system. Many payroll systems allow job costing integration. This ensures accurate project costing and helps with prevailing wage compliance if required.

1099 contractors are responsible for their own taxes, insurance, and benefits. You only pay the agreed amount. W-2 employees require payroll taxes, workers' comp, unemployment insurance, and benefits. Total cost for employees is typically 25-40% higher than wages alone.

Check your state's prompt payment laws – many require payment within 30 days of completed work or invoice receipt. Some states have penalties for late payments. Best practice is to establish clear payment terms in your subcontractor agreements and stick to them consistently.

At minimum: completed W-9, certificate of insurance, business license (if required), and signed subcontractor agreement. For larger projects, also verify licensing, bonding, and safety certifications. Collect this before work begins – it's harder to get later.

Federal law requires overtime (1.5x regular rate) for hours over 40 in a workweek. Some states have daily overtime rules. Calculate overtime on the total compensation rate, including any shift differentials or bonuses. Track daily hours carefully to ensure compliance. Also note that with the passing of the Big Beautiful Bill in 2025, overtime can be calculated differently if other types of payments are included in the pay period (like commissions or bonuses).

Late filing penalties start at $50 per form and can go up to $270 per form depending on how late you file. If you fail to file entirely, penalties can be $530 per form. File by January 31st to avoid penalties.

Check your state requirements first—some mandate weekly or bi-weekly pay for construction workers. Weekly pay helps with cash flow for employees, but increases administrative burden. Bi-weekly is most common and balances employee needs with administrative efficiency, but semi-monthly is most advantageous for cash flow and budgetary purposes.

You typically need to register and pay taxes in each state where employees work, not just where your business is based. Some states have reciprocity agreements. Consult with a payroll professional – multi-state compliance is complex and penalties are significant.

Keep payroll records for at least 4 years, including timesheets, pay stubs, tax filings, and workers' comp documentation. For subcontractors, maintain W-9s, 1099s, contracts, and payment records for at least 4 years. Some states require longer retention periods.

If they provide their own equipment and control how the work is done, they're likely contractors (1099). If you direct their work and they use your equipment, they're probably employees. The equipment factor alone doesn't determine classification – consider all factors together.

Use time-tracking apps that allow job coding, GPS verification, and photo documentation. Many integrate with payroll systems for seamless processing. Train employees on consistent time entry and review timesheets before processing payroll.

Determine the correct prevailing wage rates for each worker classification in the project location. Track certified payroll weekly, including base wages, fringe benefits, and overtime. Submit certified payroll reports as required. Penalties for non-compliance are severe.

Benefits can help attract and retain quality workers in a competitive market. Simple benefits like health insurance reimbursements or retirement plan contributions can be cost-effective. Factor benefit costs (typically 20-30% of wages) into your labor burden calculations.

Don't pay them until you receive a completed W-9. If you pay without a W-9, you must backup withhold 24% of payments for federal taxes. This creates administrative burden and damages relationships – always get a W-9 before starting work.

This is risky and often indicates misclassification. Each work relationship should be consistently classified based on the actual working arrangement. If someone is truly an employee for one project, they should generally be an employee for all projects with your company.