What You Need to Know About Processing 1099 Employees for Certified Payroll

You may assume that 1099 employees – often known as independent contractors or self-employed workers – are the answer to all of your payroll problems. After all, you don’t “own” them as employees, so they’re responsible for their own taxes, benefits, and even insurance. And if they don’t work for you, aren’t they also responsible for their own certified payroll reporting? Don’t count on it!

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Not only do you have to pay 1099 workers according to Davis-Bacon Act (DBA) prevailing wage laws, but you also have to track their hours and report them on your certified payroll reports. The same requirements apply to anyone who does construction work on a prevailing job site, regardless of whether they’re considered W2 employees or independent contractors.

This doesn’t mean you can’t or shouldn’t employ 1099 workers on prevailing wage jobs. But there are a few things you should consider.

Avoid Certified Payroll Miscalculations

First, you must ensure those 1099 employees are classified correctly, or you could face repercussions and penalties from the IRS or the Department of Labor (DOL). And don’t just take the worker’s word for it. Contrary to popular belief, it’s not the employee, or even the contracting company, who has the final decision on how laborers are classified. Workers must follow Common Law Rules set forth by the IRS to determine 1099 eligibility, including:

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee-type benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

The DOL or a state agency may have their own rules for classifying independent contractors, but most questions about the qualifications can be answered with a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Certified Payroll Reporting

If you’re confident the 1099 workers on your site are indeed classified correctly, their hours must be reported by you for all work on prevailing wage jobs, just like you report for your own W2 employees. You may need to notify the agency of the 1099 worker status, so they understand why their entries look different than other employees’ pay. You won’t have to withhold payroll taxes from 1099 workers, and they won’t be subject to any fringe requirements stated in a wage determination, but you still have to follow the hourly rate listed in the wage determination and any minimum wage laws.

If one of your subcontractors categorizes their workers as independent contractors, or if you engage a staffing agency that supplies 1099 employees to your project, it is your responsibility to ensure that these workers report their hours and income. You’re the first auditor in line and any mistakes your subcontractors make can ultimately fall on you for compliance.

How is Certified Payroll Processed?

Most agencies will require you to submit hours and pay information weekly for all people engaging in work on a prevailing wage job site. While this can be automatically populated by a construction payroll provider like eBacon, and even submitted via an online software like LCP Tracker, you should be familiar with the WH347 payroll submission form.

The WH347 is a PDF form created by the DOL to track all earnings at prevailing wage job sites. Learning how to manually enter the information yourself will ensure that you understand the process and the math involved so that you can verify all automatic uploads are error-free. It will also help you answer on-the-spot payroll questions from your employees or any auditors for the project.

If you’re not familiar with the process, we broke it down for you here in this guide. The DOL also walks you through the steps here.

Below is a sample WH347 that demonstrates how both W2 and 1099 employees are reported. As you can see, the specific differences are payroll taxes which are not withheld for a 1099 worker, and fringes and deductions that are not listed because the independent contractor is responsible for his own.

Certified Payroll Worker Challenges

Ultimately, you can hire 1099 workers for your prevailing wage jobs if they have the most suitable availability or skills. However, you must ensure that you respect their independence and do not treat them as your regular W2 employees, while still reporting them on your certified payroll reports.

It can be a fine line for many contractors to walk and can lead to violations if it’s not done correctly. Using such workers can open your reporting up to extra scrutiny by job site investigators or payroll auditors who verify that everyone onsite is following DBA laws. That can be a scary prospect.

Verify Employee Status

To mitigate your fears, do your research before you bring on 1099 workers. Make sure their status is legal and verified, and make sure all supervisors and reporting agencies are aware of the distinctions between them and your own W2 employees.

If you need help reporting 1099 earnings for prevailing wage jobs or want to suffer fewer headaches from the entire certified payroll reporting process in general, check out eBacon. Our software is specifically designed to make prevailing wage payroll and certified payroll reporting easier for contractors and subcontractors in the construction industry, regardless of employee status.

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Additional Resources:

• Certified Payroll Best Practices
• Form 1099-R FAQ

The material presented here is educational in nature and is not intended to be, nor should be relied upon, as legal or financial advice. Please consult with an attorney or financial professional for advice.