Classifying roofing crews as 1099 subcontractors instead of W-2 employees feels like it saves money — no payroll taxes, no workers' comp on the payroll, no benefits. In practice, it's the most expensive shortcut in the roofing industry. The IRS, state labor departments, and workers' comp auditors all use slightly different tests, and they all converge on the same answer: a roofer working under your supervision, on your jobs, with your tools, is an employee. Calling them a 1099 doesn't change that.
What the IRS actually looks at
The IRS uses a three-category test focused on the degree of CONTROL the employer has over the worker. They look at behavioral control (does the company tell the worker how, when, and where to work?), financial control (does the worker have a real opportunity for profit or loss, or are they paid by the hour or the square?), and the type of relationship (is there a contract, are benefits provided, is the work permanent or project-based?).
For a typical roofing crew, the answers all point to employee status: you tell them what time to show up, you supply the materials, they use your tools or company-supplied tools, you direct the work, and they have no real ability to take a loss on the job. The fact that you pay them with a 1099 at the end of the year doesn't change any of that.
What the state labor board looks at
Most states use the ABC test or a variation. To be a legitimate independent contractor under the ABC test, the worker must (A) be free from your control and direction, (B) perform work outside the usual course of your business, and (C) be customarily engaged in an independently established trade or business of the same nature.
For roofing crews, condition (B) is fatal. Roofing IS the usual course of a roofing company's business. A worker installing shingles for a roofing company cannot pass condition B no matter how the contract is written. California, New Jersey, Massachusetts, and several other states have made this explicit through statute (California's AB5 is the most well-known).
What the workers' comp auditor looks at
The workers' comp auditor doesn't care about the IRS test or the labor board test. They have their own rule, and it's brutally simple: was the subcontractor covered by their OWN workers' comp policy during the dates they worked for you? If the answer is yes — and you can produce the Certificate of Insurance to prove it — the auditor moves on. If the answer is no, the auditor charges YOU for the subcontractor's payroll at YOUR roofing rate.
This is the source of most six-figure audit invoices in the industry. You hire a 'sub crew' for $100,000 of labor over the year. You don't collect their COIs. At your audit, the carrier treats the $100,000 as your payroll and charges you for workers' comp on it at your 5551 rate. In a state where 5551 runs $25 per $100 of payroll, that's $25,000 added to your audit bill from a single uninsured sub. Multiply by every uninsured sub for the year and the math gets ugly.
The real cost of misclassification
When the IRS or state labor board catches a misclassification, the penalties stack:
• Back federal payroll taxes (FICA, FUTA, Medicare) for up to three years • Back state payroll taxes and unemployment • Penalties and interest on all of the above • Back wages if the worker should have been paid overtime under FLSA • State labor department fines (often $5,000–$25,000 per misclassified worker) • Workers' comp back premium for any uninsured periods • Personal liability — in many states the company owner can be held personally liable for misclassification penalties
And separately from any of that: if a misclassified 'sub' gets injured on the job and they don't have their own workers' comp, you are personally on the hook for their medical bills and lost wages with no insurance to back you up. A single fall from a roof can be a six- or seven-figure problem.
When 1099 IS legitimate
There are real subcontractor relationships in the roofing industry. They look like this: an established roofing company sub-bids a portion of work to ANOTHER established roofing company that has its own employees, its own workers' comp policy, its own general liability, its own license, and its own business setup. The subcontractor company performs the work using its own crews, on its own schedule, for an agreed scope and price. The two companies are at arm's length.
That's a legitimate subcontractor relationship. The sub gets a 1099 because they're a separate business. They have their own policies. You can produce their COIs at audit. Everyone is properly insured and the relationship survives any audit or investigation.
What's NOT a legitimate subcontractor relationship: hiring individual roofers, paying them by the hour or by the square, telling them what jobs to show up at, supplying their tools and materials, and 1099-ing them at the end of the year. That's an employee relationship dressed in a paper costume.
The right approach
If you have crews working under your direction, put them on payroll as W-2 employees. Pay the workers' comp. Pay the payroll taxes. The cost is real but predictable, and it's far less than what a misclassification audit costs.
If you genuinely subcontract portions of work to other roofing companies, treat them like business partners: collect a current COI for both workers' comp and general liability before they start any work, verify the policies are in force, re-verify at every renewal, and keep the COIs in a folder. Set up a tracking system so you don't lose track of which sub's coverage is about to expire.
An insurance shop that focuses on roofing contractors can help you set up COI tracking and walk you through the W-2 transition if you've been operating on the 1099 model. The cost of doing it right is much smaller than the cost of getting caught doing it wrong.