Denver Construction 1099 vs W2: The Real Cost of Misclassifying Workers

Denver’s construction market is busy. For a growing trades or construction company, this means one thing: you need more help. The projects are there, but finding and keeping good workers is the number one challenge. As you look to expand your crew, you face a critical decision that many business owners get wrong.

You hire a few skilled workers. You tell them they are 1099 subcontractors. You hand them a check for the full amount at the end of the week, no taxes taken out. You breathe a sigh of relief. You just avoided the headache of payroll taxes, the complexity of unemployment insurance, and the cost of workers' compensation.

This approach feels simple. It feels lean. Unfortunately, it is also one of the biggest financial risks you can take as a business owner.

Many construction companies in Colorado are growing on a foundation of 1099 subcontractors. They are vaguely aware of misclassification risks but are far more concerned with immediate cash flow. This fear of payroll costs often paralyzes them from hiring their first true W2 employee. This paralysis not only slows their growth but leaves them exposed to a state or IRS audit that could be financially devastating.

This article is not about legal advice. It is about business clarity. Let's look at the real difference between a 1099 contractor and a W2 employee, the severe risks of getting it wrong, and why embracing the W2 model is the only sustainable way to grow.

The Temptation of the "Easy" 1099

The appeal of the 1099 model is obvious. On the surface, it seems much cheaper.

When you hire a W2 employee, you are responsible for:

• Withholding and paying their portion of federal and state income tax.
• Paying the employer's share of FICA taxes (Social Security and Medicare), which is 7.65% of their wages.
• Paying federal (FUTA) and state (SUTA) unemployment taxes.
• Providing workers' compensation insurance.

When you hire a 1099 independent contractor, you are responsible for... none of that. You simply file a 1099-NEC form at the end of the year if you paid them over $600. The worker is responsible for their own taxes, their own insurance, and their own retirement.

For a construction business with tight margins and variable workloads, the 1099 seems like the perfect solution. It looks like all the reward with none of the administrative burden.

This is a dangerous illusion. The problem is that you do not get to choose whether a worker is an employee or a contractor. The nature of the work relationship defines their status, not the form you decide to file.

The Misclassification Minefield

The IRS and the Colorado Department of Labor and Employment (CDLE) have very specific tests to determine if a worker is an employee. If you treat a worker like an employee, they are an employee in the eyes of the law, regardless of what you call them or what agreement you both signed.

While the full IRS test has many factors, they boil down to one central question: who has the right to control the work?

These factors are grouped into three categories:

1. Behavioral Control: Do you control how the worker does their job?
   • Do you set their specific hours? (e.g., "Be on site from 8:00 AM to 4:30 PM.")
   • Do you provide extensive instruction on how the work is to be done, beyond just the final result?
   • Do you provide the tools and equipment needed to do the job?
   • Do you train them to do the work in your company's specific way?If you answered yes to these, that worker looks like an employee. A true subcontractor, like a specialty plumbing crew, determines their own methods for installation.
2. Financial Control: Do you control the business aspects of the worker's job?
   • Is the worker paid a guaranteed hourly wage or salary? (Employee) Or are they paid a flat fee for the entire project? (Contractor)
   • Does the worker have the ability to incur a profit or a loss on the job? (Contractor)
   • Does the worker invest in their own tools, truck, and insurance? (Contractor) Or do they just show up and use your equipment? (Employee)
   • Can the worker freely work for other companies at the same time? (Contractor) An employee is paid for their time. A contractor is paid for a result.
3. Relationship of the Parties: How do you and the worker perceive the relationship?
   • Is the work they perform a key aspect of your business?
   • This is a critical point in construction. If you are a framing company, the framers you hire are performing the central service of your business. It is very difficult to argue they are independent contractors. The electrician or plumber you hire, however, is providing a separate, specialized service and is more likely a true subcontractor.
   • Is the relationship permanent or expected to continue indefinitely? (Employee) Or is it for one specific project with a defined end date? (Contractor)

Think about the "subcontractor" framer you just hired. You tell him to be on-site at 7 AM. You provide the nail gun, the compressor, and the saws. You pay him $30 an hour. He is not a subcontractor. He is your employee, and the government sees him that way.

The Colorado Factor: Audits Are Not Rare

This is not just an IRS issue. In many ways, the state of Colorado is more aggressive in pursuing misclassification. The CDLE is laser-focused on this because it directly impacts two major state funds: unemployment insurance and workers' compensation.

When you classify an employee as a 1099 contractor, you are not paying into the state unemployment fund. If you later lay that worker off and they file for unemployment, this raises an immediate red flag at the CDLE. That single unemployment claim can trigger a full audit of your business.

Likewise, if that "contractor" gets hurt on your job site and does not carry their own workers' compensation policy (which many do not), the liability will flow uphill to you. You will likely be held responsible for their medical bills and lost wages. Your failure to cover them will also trigger an audit and massive penalties from the state.

The True Cost of an Audit

This is the part that business owners do not fully grasp until it is too late. They are worried about the 10-15% extra cost of a W2 employee. They should be worried about the 100-200% cost of an audit.

If you are found to have misclassified your workers, you will not get a simple warning. You will get a bill.

You will be ordered to pay:

• All back payroll taxes you should have withheld and paid for the past three years. This includes the employee's share and your employer's share of FICA taxes.
• Significant penalties for failure to file and failure to pay. These penalties can be as high as 100% of the tax owed.
• Interest on all of the above, compounded daily.
• Back unemployment taxes (FUTA and SUTA) for all misclassified workers.
• Back workers' compensation premiums for the entire period.

But it gets worse.

The IRS may also determine that these "contractors" were non-exempt employees. That means you could be on the hook for back overtime pay for every hour they worked over 40 in a week.

This is not a small bill. For a company that has been misclassifying five or ten workers for several years, this liability can easily run into the six figures. It is an amount that can, and does, bankrupt businesses. All the money you thought you were "saving" was just an unpaid debt accruing massive interest and penalties.

W2s: The Cost of Growth vs. The Price of Risk

The fear of hiring is understandable. Yes, a W2 employee has a "loaded" cost. With payroll taxes and workers' comp, a $30/hour worker might actually cost you $36 or $38/hour.

But here is the critical shift in thinking: This is the true, correct cost of labor. It is a predictable, manageable business expense. You can, and must, build this cost into your estimates and bids. Your competitors who are doing things correctly are already doing this.

An audit, on the other hand, is an unpredictable, unmanageable liability. You cannot budget for it.

The paralysis you feel about hiring a W2 employee is what is truly holding your business back. You are stuck trying to run a professional construction company with a workforce that is, by definition, temporary and non-committal.

The Hidden Power of a W2 Workforce

Doing things the right way is not just about avoiding risk. It is about building a better business.

• Control and Quality: When a worker is your employee, you have the legal right to train them. You can set their schedule. You can demand they follow your processes and meet your quality standards. You cannot legally do this with a 1099 contractor.
• Stability and Loyalty: An employee is part of your team. They are more likely to be loyal, to show up every day, and to care about the company's success. This drastically reduces turnover and the constant, costly scramble to find new "subs" for every job.
• Building a Team: You cannot build a company culture with a revolving door of 1099s. A stable W2 workforce allows you to build a core team, develop leaders, and create a company that people are proud to work for.
• Sustainable Growth: You can only scale your business sustainably with a legal, stable workforce. You can confidently bid larger, more profitable jobs because you know you have a reliable team to execute the work, not just a list of guys you hope will answer the phone.
• Protection: When your W2 employee is injured, your workers' compensation insurance handles it. That is what it is for. It protects you and your employee. This system is designed to work, but it only works if you use it correctly.

How to Make the Switch

If this article sounds familiar, it is time to act. Do not wait for an audit notice to arrive in the mail.

1. Get a Professional Review: Sit down with a bookkeeping or accounting firm that understands the construction industry in Colorado. We can look at your current labor setup and help you identify who is a true subcontractor and who is a misclassified employee.
2. Understand Your True Costs: We can help you calculate the actual loaded cost of a W2 employee. Once you see the real numbers, you can adjust your bidding process to ensure you are profitable while covering your legal obligations.
3. Set Up Payroll: This is not something you should be doing by hand. A modern payroll service, managed by your bookkeeper, makes this process simple. It automates tax payments, filings, and ensures you are compliant.
4. Differentiate Your Labor: You can absolutely continue to use true subcontractors for specialty work. The key is to have a clear line. Get a contract from them, make sure they have their own general liability and workers' comp insurance, and collect a W-9. Your core crew, however—the people who are essential to your daily operations—need to be W2 employees.

The 1099 shortcut is tempting, but it is a path that leads to risk and stagnation. Building a real, scalable, and professional construction business in Denver means building a real, professional team. The W2 model is not a burden. It is the foundation for long-term success.