1099 vs. W2 crew cost tracking for contractors
A crew of two W2 framers and a 1099 electrician on the same job produce labor costs that behave in completely different ways, even though from the job site it looks like everyone is just working. One of those costs has a fixed price you already agreed to. The other has hidden layers that do not show up on a pay stub, and skipping them is one of the most common ways a job cost quietly understates what labor actually cost.
Mixing the two together — treating every hour on the job the same, whether it belongs to an employee or a sub — makes the job cost wrong in a specific, predictable direction: it looks better than it is, because it is missing costs that are real but invisible on paper.
Below: how 1099 and W2 labor need to be costed differently, what a burdened rate actually includes, and the mistakes that come from not making the distinction.
Two different kinds of labor cost
| 1099 subcontracted labor | W2 employee labor |
|---|---|
| Fixed price, agreed to in advance — the invoice amount is the full cost. | Hourly wage plus payroll taxes, workers compensation, benefits, and unproductive paid time. |
| No burden calculation needed. What you agreed to pay is what the job cost. | A burdened rate is required, or the job cost understates true labor cost. |
| Book the cost as committed the day the sub is awarded, before the invoice arrives. | Post hours to the job as they are worked and approved, at the burdened rate. |
| Risk is priced into the sub quote — theirs to manage, not yours. | Risk sits with you — overtime, slow days, and comp claims all land on the job cost. |
A sub invoice is close to the full truth already. An employee wage is only the visible part of the cost — the part that shows up on the pay stub, not the part the business pays around it.
What burden actually includes
If a framer earns $28 an hour, that hour does not cost the business $28. It costs $28 plus a stack of costs that never appear on the worker paycheck but absolutely appear on the business bank statement.
- Employer-side payroll taxes — Social Security, Medicare, unemployment insurance.
- Workers compensation premiums, which vary significantly by trade and comp class.
- Benefits, where offered — health coverage, paid time off, retirement contributions.
- Paid non-productive time — drive time between sites, weather delays, equipment downtime the worker is still paid for.
None of these apply to a 1099 sub. The subcontractor is a separate business carrying its own insurance and its own overhead, and all of that is already folded into the price on their invoice. Adding a burden calculation on top of a sub invoice double-counts a cost that is already there.
The mistake contractors make treating both the same
The common error runs in one direction: employee hours get costed at the base wage, the way a sub invoice gets costed at face value, with no burden added. It feels consistent — every hour treated the same — but it silently removes a real cost from every job that uses employee labor.
If burden runs a third on top of wages, which is common once workers comp and payroll taxes are included, a job that looks like it earns an 8% margin on base wages can be running at a loss once labor is costed correctly. The job did not change. The number describing it just stopped telling the truth.
The reverse mistake is rarer but happens too: applying a burden multiplier to a sub invoice, inflating a cost that was already complete. A 1099 invoice for $7,500 costs the job $7,500 — not $7,500 plus a percentage that belongs only to employee labor.
A worked example
A remodel uses 180 hours of W2 framing labor at a $24 base wage, plus a 1099 electrician invoicing a flat $4,200 for the job.
- Costed at base wage with no burden: 180 hours × $24 = $4,320 for framing, plus $4,200 for the electrician. Total labor cost: $8,520.
- Costed correctly, with a burden multiplier of 1.35 applied only to the W2 hours: 180 hours × $32.40 burdened = $5,832 for framing, plus the same $4,200 flat for the electrician. Total labor cost: $10,032.
The gap — $1,512 — is real cost the job incurred either way. Costing it correctly does not create the cost; it just makes it visible in time to price the next similar job properly, instead of finding out at tax season that framing labor has been quietly underpriced all year.
SiteLedger tracks each worker at their own burdened rate, so W2 hours post to the job already reflecting the true cost, while a 1099 sub cost is booked at the flat amount agreed on, with no burden layered on top by mistake.
The burden is the part that gets forgotten
An employee at a given hourly rate does not cost you that rate. Payroll taxes, insurance, holiday, tools and downtime sit on top, and depending on the trade and the jurisdiction the loaded cost is meaningfully higher than the headline figure. A subcontractor invoice, by contrast, is close to the whole cost.
Costing both at their headline rate makes employees look cheaper than they are and makes any comparison between a job run with staff and one run with subcontractors meaningless. Apply a burden multiplier to employee hours, keep it written down, and review it once a year.
Common questions
- Do I need to calculate a burdened rate for subcontractors?
- No. A 1099 sub invoice already reflects the sub full cost of doing business, including their own insurance and overhead. Applying a burden multiplier on top of it double-counts a cost that is already priced in.
- What is a burdened labor rate?
- The true cost of an hour of W2 employee work — base wage plus employer payroll taxes, workers compensation, benefits, and paid non-productive time. It is always higher than the wage on the pay stub, often by a third or more.
- Why does treating 1099 and W2 labor the same understate job cost?
- Because it usually means employee wages get costed at face value, the way a sub invoice is, with no burden added. That silently removes real payroll and insurance costs from the job, making margin look better than it actually is.
- How do I find my own burden multiplier?
- Take a year of total payroll cost for one worker — wages plus every tax and premium — and divide it by the hours actually billable to jobs. Redo the calculation annually, since it shifts with insurance rates and comp class.
- When should a subcontractor cost be booked to a job?
- The day the sub is awarded the work, as a committed cost, not the day the invoice arrives. Waiting for the invoice means the cost is invisible on the job report for however long the sub takes to bill.
Keep reading
Job costing for contractors: how to know your margin before the job closes
How to tie labor, materials, subs and overhead to a job while it is still open, budget each bucket, and spot a job going bad early enough to fix it.
Markup vs margin: the difference that quietly costs contractors money
Markup is what you add to cost. Margin is what you keep. A 20% markup is a 16.7% margin — the arithmetic, a conversion table, and how to price backwards.
Construction overhead allocation explained
How to allocate overhead across jobs without pretending to a precision you do not have, and why the method matters less than applying it consistently.