As your construction business grows, you’ll reach a critical decision point: should you hire in-house employees or bring on independent subcontractors? The right labor model can make or break your profitability, compliance, and project efficiency.
In this guide, we break down the legal, financial, and practical differences between employees and subcontractors, and help you choose what’s best for your next job.
Why the Right Labor Strategy Matters
Labor is one of the largest, and most complex, expenses in construction. Making the right decision impacts your:
- Cash flow and profit margins
- Project timelines and crew reliability
- Compliance with IRS and Department of Labor regulations
- Company culture and client experience
Whether you’re hiring your first helper or building a larger team, understanding the trade-offs helps you scale with confidence.
Understanding the Basics: Employees vs. Subcontractors
At the core, employees and subcontractors differ in how they’re classified, managed, and taxed. Employees are workers who operate under your direction: you control their schedule, provide the tools and materials, and are responsible for withholding payroll taxes and offering benefits like workers’ compensation and unemployment insurance.
In contrast, subcontractors are independent professionals who run their own businesses. They control how, when, and with what tools they complete the work you assign. You’re not responsible for their taxes, insurance, or training, but you also have less control over how the work gets done. Understanding these differences is essential not only for staying compliant with labor laws but also for managing costs, flexibility, and job site performance.
Legal Considerations
Employees
Hiring employees means taking on more responsibility, but also more control. You’ll need to:
- Comply with federal and state labor laws
- Withhold and pay payroll taxes (FICA, FUTA)
- Carry workers’ compensation and unemployment insurance
- Follow OSHA safety guidelines and provide training
Subcontractors
With subcontractors, you’re hiring an outside business to complete a defined scope of work. You must:
- Issue a 1099-NEC if they earn $600+ per year
- Avoid controlling their schedule or methods
- Ensure they carry liability and workers’ comp insurance
Warning: Misclassifying employees as subcontractors can lead to hefty IRS penalties, back taxes, and lawsuits. When in doubt, consult a labor attorney or tax professional.
Financial Impact
Employees: Predictable Costs, Bigger Overhead
- Higher upfront costs due to payroll taxes, insurance, and benefits
- More stable scheduling and long-term ROI
- Eligible for tax deductions on wages, benefits, and training
Subcontractors: Lower Overhead, Variable Costs
- No tax withholding or benefits required
- Pay per job or per hour—only when you need them
- Higher rates, but fewer long-term financial obligations
Practical Differences on the Job Site
Employees
- Pros: Loyalty, culture fit, standardized quality, easier scheduling
- Cons: Slower to scale, need ongoing work and training
Subcontractors
- Pros: Scalable labor for busy seasons, specialized skill sets
- Cons: Less control, inconsistent availability, risk of misalignment
Example: Framing a residential addition may require the reliability of employees. But for a specialized tile install, a subcontractor may offer better expertise.
When to Hire Employees
Choose employees if you:
- Need consistent availability across multiple jobs
- Want to build a unified, long-term team
- Are ready to invest in training, tools, and benefits
SmartBuild Tip: Use SmartBuild to help your project management! Assign employees to jobs, track hours, and monitor performance to get the most from your team.
When to Use Subcontractors
Choose subcontractors if you:
- Have fluctuating workloads or short-term projects
- Need niche expertise (e.g., roofing, solar, historic restoration)
- Want flexibility without long-term commitments
Pro Tip: Store subcontractor agreements, licenses, and insurance certificates securely in SmartBuild for easy compliance tracking.
Blended Approach: The Best of Both Worlds?
Many construction businesses use a hybrid model, combining a small core team of employees with a trusted network of subcontractors. This gives you:
- Reliability for key operations
- Flexibility to scale up for larger or specialized jobs
- Protection against labor shortages
Final Thoughts
There’s no one-size-fits-all answer: your decision depends on your business model, growth stage, and the type of projects you take on. Whether you hire employees, subcontractors, or a mix of both, making informed choices about your workforce is key to staying profitable, compliant, and efficient.
That’s where SmartBuild comes in. Our platform gives you complete visibility and control across your entire operation, from managing crews and schedules to tracking job costs, estimating sales, and monitoring project progress. By centralizing your project management, financial insights, and client communication in one easy-to-use system, SmartBuild helps you streamline operations, reduce costly mistakes, and focus more time on growing your business.
Want to know more about the platform? Get in touch with our team and book a demo today!
Frequently Asked Questions (FAQ)
1. What’s the biggest risk of using subcontractors?
Misclassification. If you treat a subcontractor like an employee (dictating their hours, tools, or methods), you may face IRS penalties.
2. Do I need insurance for subcontractors?
Yes. Require proof of liability and workers’ compensation insurance to protect your business.
3. Can SmartBuild help manage both employees and subcontractors??
Absolutely. SmartBuild lets you track hours, assign jobs, store documents, and analyze labor costs across all worker types.
4. What are some signs it’s time to hire employees?
If you’re turning down work due to lack of availability, or you’re relying on the same subcontractors repeatedly, it may be time to build an in-house crew.
