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Nailed It or Failed It: What Are the Rules for 1099 Employees Under the New 1099 Rules?

So, what are the rules for 1099 employees in 2025 and beyond? If your crew setup has been living in that fuzzy “grey zone” between independent contractors and W-2 employees, the line just got a whole lot sharper. The IRS and the Department of Labor (DOL) have made changes that will directly impact builders, remodelers, and trades professionals. The days of “don’t ask, don’t tell” about worker classification are over.

For companies running on lean margins, knowing the new 1099 rules isn’t just about compliance, it’s about protecting your profit, your projects, and your sanity. It is also about making sure your business foundation is strong enough to grow. That’s where 4 Level Coach comes in, guiding custom home builders and remodelers to put structure around these new realities so you can focus on growth instead of scrambling with penalties.

Why This Matters More Than Ever

Think about it: one misclassified framer, drywaller, or roofer could mean thousands in back taxes, penalties, and unpaid wages. In an industry where margins are often thinner than drywall, that can wipe out the profit from several jobs.

If you’ve ever thought “they’re a contractor because I call them one,” these rules are your wake-up call. A business profit coach like 4 Level Coach can remind you that every classification decision isn’t just about paperwork, it’s about protecting your ability to scale.

1. The Big Shift: DOL’s Six-Factor Economic Reality Test

As of March 11, 2024, the DOL rolled out the six-factor “economic reality” test under the Fair Labor Standards Act (FLSA). This is how they decide if someone is really independent, or just a mislabeled employee.

Here’s the test, plain and simple:

Profit or Loss: Can the worker make money or lose money based on their own business decisions? Example: A siding subcontractor buys their own materials, bids multiple jobs, and either makes money or eats the loss, that’s independence.
Investment in Tools/Equipment: Who’s footing the bill for tools? If your crew shows up and uses your saws, ladders, and trucks, that screams W-2.
Permanency of Relationship: Is the relationship ongoing or project-by-project? Six months on one build = contractor. Six years of steady work = employee.
Control Over Work: Who decides the schedule, method, and standards? If you tell them “be here at 7 a.m. and use this method,” you’re exercising employer control.
Integral to the Business: Is the work central to your company’s mission? For a GC, framing, drywall, and roofing are core = employee risk. Accounting services = safer contractor ground.
Independence as a Business: Do they market to other clients, carry insurance, set their own rates? If yes, strong 1099 case. If no, rethink.

☑ Pro Tip: Imagine a DOL auditor on your job site with a clipboard. If they can’t easily spot the independence of your subs, you’ve got a problem. Be sure to audit your own crews before the government ever shows up, putting you back in control.

2. IRS vs. DOL: Two Referees, Different Rulebooks

The tricky part is you’re playing by two sets of rules:

DOL’s Test → Worker classification under wage and hour laws.
IRS Test → Worker classification under tax law.

The IRS uses “common law control” factors, basically, who’s the boss in practice?

Here’s the kicker: You could be compliant with one and still in violation with the other. If both agencies decide to look into your payroll, your profits might vanish faster than a tool left unattended on site.

☑ Pro Tip: If in doubt, file Form SS-8 with the IRS. It’ll give you an official ruling. But warning: once you invite them into the conversation, you can’t shut the door again. Instead of guessing, create systems so your worker classifications align with both IRS and DOL standards.

3. The New 1099 Rules on Reporting

Here’s where it gets real for builders:

Current Rule (through tax year 2025)
Pay a contractor $600 or more? File a 1099-NEC. Period.
New Rule (starting in 2026)
Threshold jumps to $2,000.
Beginning in 2027, that number will adjust for inflation.

This means fewer forms for you, but don’t mistake that for a tax break. The IRS still expects income to be reported, whether or not you issue a 1099.

☑ Pro Tip: Track contractor payments in your accounting system so you’re ready for the 2026 shift. Don’t scramble in January. Set up tracking systems now so when these changes land, you’re not behind.

4. The Builder’s Gut-Check: 1099 or W-2?

Let’s put this in on-site language:

You set the schedule → W-2 risk.
You supply tools → W-2 risk.
They only work for you → W-2 risk.
Their work is your core trade → W-2 risk.
They hustle, market, and juggle other jobs → Strong 1099 case.

Real-World Example:

A framing crew that works exclusively for you, year after year, using your tools and wearing your branded shirts = W-2 employees in disguise.
A finish carpenter who quotes their own rates, brings specialized tools, and works for five other builders in town = true 1099 contractor.

5. The Risks of Getting It Wrong

Misclassification is like cutting corners on a foundation, you may not feel it right away, but when it collapses, it’s ugly.

DOL Penalties → Back wages, unpaid overtime, civil fines.
IRS Penalties → Payroll taxes, interest, late fees.
State Penalties → Some states (California, Massachusetts, New Jersey) use stricter tests than federal law.

Misclassification is like cutting corners on a foundation, you may not feel it right away, but when it collapses, it’s ugly.

DOL Penalties → Back wages, unpaid overtime, civil fines.
IRS Penalties → Payroll taxes, interest, late fees.
State Penalties → Some states (California, Massachusetts, New Jersey) use stricter tests than federal law.

☑ Pro Tip: If you work across state lines, double-check state-specific rules. Don’t assume federal law covers you.ro Tip: If you work across state lines, double-check state-specific rules. Don’t assume federal law covers you.

6. Top 3 Misclassification Mistakes Builders Make

“He’s 1099 because I pay him by the job.”
Payment method doesn’t decide status, control and independence do.
“She signed a contractor agreement, so we’re covered.”
A contract won’t save you if the reality of the relationship says otherwise. The IRS and DOL look at facts, not paperwork.
“They wanted to be 1099, it’s their choice.”
Worker preference doesn’t matter. If the work looks like W-2 employment, it is.

Case in Point: A small GC in Texas paid his roofing crew as 1099s for years. When one filed for unemployment, the state reclassified the entire crew as W-2s retroactively. Result: tens of thousands in back taxes and penalties.

Be sure to audit your agreements, crew relationships, and payroll structures.

7. State Spotlight: Where Rules Get Stricter

Not all states play by the same rulebook. Some take the DOL test and crank it up to 11.

California: Uses the ABC test. A worker is an employee unless you can prove (A) they’re free from control, (B) they do work outside your core business, and (C) they run their own business. Framing crew? Automatic W-2.
New Jersey & Massachusetts: Both apply strict versions of the ABC test, heavily favoring employee status.
Other states: Many follow federal rules, but always check local labor departments, especially if you do projects across state lines.

☑ Pro Tip: Even if you’re compliant federally, a stricter state can still penalize you. That’s why you must track the shifting in compliance rules.

8. Future Outlook: Where 1099 Rules Are Headed

Don’t assume these rules are set in stone. Here’s what’s on the horizon:

More Enforcement: Expect both the IRS and DOL to ramp up audits, misclassification is a hot target for revenue recovery.
Technology Tracking: With digital payment systems (Venmo, PayPal, etc.), it’s easier than ever for agencies to track payments.
Gig Economy Spillover: Rules tested on Uber and Lyft workers are likely to spill into construction, where “gig-style” subcontracting is common.
State-by-State Tightening: More states are considering adopting the ABC test. If that happens nationally, many current 1099s will be forced into W-2.

☑ Pro Tip: Stay ahead by building flexible crew models. Don’t rely too heavily on 1099s for core work. Design sustainable crew structures that fit your growth goals while staying compliant.

9. Your Builder Action Plan

Here’s your step-by-step playbook:

Review Your Current Crew: Audit every role, subs, supers, estimators, specialty trades.
Apply the Tests: Use both DOL’s six factors and IRS control factors.
Fix Your Contracts: Spell out independence – insurance, tools, multiple clients.
Collect W-9s: No W-9, no pay. Period.
Know Your Deadlines: 1099-NECs are due January 31. No extensions.
Prep for 2026: Adjust your tracking system now for the $2,000 threshold.
Convert Where Needed: If a worker is clearly W-2, don’t risk it, make them payroll.

4 Level Coach can partner with you to put this action plan in place, making sure you don’t just know the rules, but apply them in a way that protects and grows your business.

Too Long; Didn't Read for Builders

The new 1099 rules keep the $600 threshold through 2025, then raise it to $2,000 starting 2026.
If a worker looks and acts like an employee, treat them like one.
Clean contracts, W-9s, and documentation are your best defense.
Misclassification is one mistake you’ll pay for long after the project wraps.

Most Relevant Resources

IRS – Reporting Payments to Independent Contractors (Form 1099-NEC)
DOL – Independent Contractor Final Rule (Economic Reality Test, March 2024)
IRS – Form SS-8 (Determination of Worker Status)

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