What to collect from your Subcontractor

Things you should be collecting from your subcontractors

Disclaimer: you should always talk to your tax professional and or insurance agent for more detailed information or questions.

Whether you are a real estate investor, a General Contractor, Property manager or honestly any other type of business, you often hire subcontractors to perform specific duties for your business. In doing so there are certain things you should be collecting from these individuals or businesses to help ease the burden of tracking for 1099s, workers compensation insurance audits and even protecting you against legal ramifications.

At a very minimum, you as a business owner, should be asking your subcontractors for these items before you pay them for services or even before they start working for you. Often times, if you don’t get it up front, you may never get it once they are paid and gone.

It is good practice to request a full package containing a W9, Certificate of Insurance and an agreement before they start work and definitely before they get paid.

IRS Form W9 – Request for Taxpayer Identification Number and Certification

Whether your subcontractor is a business or individual, you as the business owner should always request this from them.

As a business owner, any subcontractors, freelancers, consultants, or vendors that you pay over $600 in 1 year will require you to prepare and file a Form 1099. A copy will be sent to the IRS and a copy will be sent to your contractor.

So then why is the W9 important for me to collect?

The W9 provides you all of the important contact information for the individual or business in which you will need to fill out the 1099s each year.

It is good practice to request one each year in case the address changes, business name changes, etc.

Lastly, in some workers compensation audits, you may be required to produce these forms and could be penalized for not having them on file.

Certificate of Insurance or COI

Not every individual or business owner is required to carry insurance depending on their type of business and services. Unfortunately, in the trade and construction industry there are many individuals and businesses that do not carry insurance but should. The biggest pit falls business owners such as yourself get into is if the subcontractor does not carry insurance and they step onto your jobsite, work location; you are often times liable for any damage or injury caused by them.

Insurance audits that many businesses go through every year continually penalize and fine businesses for having uninsured subcontractors work on their jobsites or work locations. Often these cuts into their margins, budgets, and costs of doing business.

What should you do then?

Anyone that comes onto your work location to perform a specific service for your business or project, you should request a Certificate of Insurance from them. If they are not insured and you still want to work with them, it is general practice to withhold a certain percentage of their pay as coverage for insurance that you will eventually have to pay for.

It is a good idea to request this every year at minimum since policies do expire every year or often times on each job. The subcontractor may change insurance policies, carriers, policy limits and so on.

Subcontractor Agreement

As you hire subcontractors to work on your projects, it is always a good idea to get an agreement in place.

This will help determine the scope work, terms of payment, documents to request and any other important items that need to be agreed upon for your project.

Verifying your Subcontractor is Properly Licensed

Does your state require certain contractors or trades to carry a license? Often times, a contractor isn’t legally allowed to work on certain projects of certain dollar amount with out having a license. Additionally, if you project requires inspections to take place, an unlicensed contractor could prevent you from passing inspections.

Additionally, you run the risk of incurring fines from certain states and could even be out of compliance with your insurances if you hire an unlicensed contractor.

It is a good practice to verify with your state, insurance agent and even licensing boards to verify the pros and cons.