Payroll for Contractors: A Complete Guide

Employees vs. 1099 Subcontractors

The first question in contractor payroll: who is an employee vs. a 1099 independent contractor? This matters enormously because employees require full payroll tax withholding, and the IRS scrutinizes contractor classification closely.

Someone is likely an employee if:

• • You control when, where, and how they do their work
• • They work exclusively or primarily for you
• • They use your tools and equipment
• • They're paid hourly or by the day, not by the project
• • You set their hours and schedule

Someone may be a 1099 subcontractor if:

• • They operate their own business and work for multiple clients
• • They supply their own tools and set their own methods
• • They're paid per project (not hourly)
• • They're free to accept or reject work

Misclassifying employees as 1099s is one of the most common and costly mistakes in construction. The IRS can assess back taxes, penalties, and interest going back years. When in doubt, consult a CPA or employment attorney in your state.

Payroll Taxes: What You Owe

When you pay employees, you're responsible for withholding and remitting several taxes:

As an employer, your "payroll tax expense" is the employer's share — roughly 7.65% of wages plus FUTA/SUTA. On a $30/hour employee, plan for ~$2.30/hour in employer payroll taxes alone.

Overtime Rules for Contractors

Under federal law (FLSA), non-exempt employees must be paid 1.5× their regular rate for all hours over 40 per workweek. Most construction workers are non-exempt and subject to overtime.

State overtime rules vary. Several states have daily overtime rules (California: OT after 8 hours/day), double-time rules, or lower overtime thresholds. Know your state's rules — they often exceed federal minimums.

Key rule: overtime is calculated on the workweek (Sunday–Saturday), not the pay period. If an employee works 50 hours this week and 30 hours next week on biweekly payroll, you still owe 10 hours of OT this week — you can't average across the two weeks.

Choosing a Pay Period

Common pay periods for contractors:

• Weekly — Employees get paid every Friday. Highest admin burden. Preferred by field workers (especially lower-wage employees) who live paycheck to paycheck.
• Biweekly — Every two weeks. Most common in construction. Good balance of admin ease and employee satisfaction. 26 pay periods per year.
• Semi-monthly — 1st and 15th (or similar). 24 pay periods per year. Creates complexity with overtime calculation (workweeks don't align neatly with semi-monthly dates).
• Monthly — Once per month. Easiest admin, but can be hard on field workers. Less common in trades.

Prevailing Wage and Certified Payroll

If you work on any government-funded projects (federal, state, or local), you may be subject to prevailing wage laws (Davis-Bacon Act for federal). This requires:

• • Paying minimum wage rates set by the Department of Labor for each trade in your geographic area
• • Submitting weekly certified payroll reports (WH-347 form) to the project owner
• • Keeping detailed records of hours, wages, and job classifications

Prevailing wage violations carry severe penalties. If you're bidding public work, consult with a payroll service familiar with certified payroll requirements.

Tax Deposit Schedule

Payroll taxes must be deposited with the IRS on a schedule based on your tax liability:

• Monthly depositors: Deposit by the 15th of the following month. If total payroll taxes were under $50,000 in the prior lookback period.
• Semi-weekly depositors: If taxes exceed $50,000/year. Deposit within 3 business days of payroll.

Missing deposit deadlines results in penalties of 2–15% of the unpaid amount. Use the IRS Electronic Federal Tax Payment System (EFTPS) for deposits.