How much should I pay subcontractors or employees?

Why this matters now: Compensation and classification are inseparable. Misclassifying a worker can create tax, insurance and labor exposure, while underpaying correctly classified workers produces turnover and delivery failures.

Decide whether the worker is an employee or independent contractor before deciding the pay method. A 1099 form does not turn an employee into a contractor.

The IRS evaluates behavioral control, financial control and the relationship between the parties. Detailed instructions, training, fixed schedules, company-provided tools, ongoing relationships and work that is central to the business can point toward employee status. A contractor is more likely to control how work is done, invest in tools, bear a possibility of profit or loss, market services to others and accept project-based risk. No single factor decides every case.

If the worker is an employee, benchmark the job by occupation, experience and the Washington-Arlington-Alexandria labor market, then add the employer’s loaded costs. In 2026, employer Social Security and Medicare taxes generally total 7.65% before unemployment taxes, workers’ compensation, benefits and overhead. The amount charged to a customer must cover all of those costs plus nonbillable time and profit.

If the worker is a true subcontractor, the rate will often be higher than an employee’s hourly wage because the subcontractor funds self-employment taxes, insurance, equipment, downtime, administration and business risk. Compare complete project cost and deliverables, not hourly figures alone. The subcontract should define scope, acceptance, schedule, payment, insurance, confidentiality, ownership of work product, change control and applicable flow-down requirements.

Virginia contractors face additional local documentation. Loudoun requires contractors applying for a business license to address state licensure, workers’ compensation requirements and subcontractor reporting. Businesses with more than two employees generally must obtain Virginia workers’ compensation coverage, and contractors submit Form 61A in the local licensing process.

Do not use contractor status solely because the business cannot afford payroll. If the relationship functions as employment, the label can create back taxes and other liabilities. The IRS allows either party to request a worker-status determination on Form SS-8 when genuine uncertainty remains.

A practical compensation process has four steps: classify correctly, benchmark the market, calculate loaded cost, and price the customer work above that cost. The cheapest nominal rate is rarely the cheapest operating decision if it causes misclassification, rework or turnover.

Action checklist

• Document the classification analysis before work begins.
• Compare total employee and contractor cost, not base wage with invoice rate.
• Use written scopes and verify insurance, licenses and flow-down clauses for subcontractors.

References and resources

• IRS Independent Contractor or Employee Guidance
• IRS Publication 15-A, 2026
• IRS Form SS-8 Information
• Loudoun Business License Tax: Contractor Requirements
• Starting a Business in Loudoun: Workers’ Compensation