Classifying your workers correctly isn’t optional. NYC Home Improvement Contractors (HICs) are heavily scrutinized by DCWP, NYS DOL, NYS Workers’ Compensation Board, and the IRS — and all of them treat misclassification as a serious violation.

If you get this wrong, you risk fines, back wages, back taxes, unpaid workers’ comp premiums, audits, contract violations, and even suspension of your HIC license.

This guide makes it painfully clear: when someone is a W-2 employee, when they can be a 1099 subcontractor, and how contractors screw this up.

1. The Quick Take

If you control how, when, and where the person works, they’re an employee.

If they run their own business, set their own methods, and take on financial risk, they may be a contractor.

Most HICs want workers to be 1099. Most workers legally need to be W-2.

That’s the honest truth.

2. Why This Matters for NYC HICs

You’re legally required to:

• Carry workers’ comp insurance for employees (DCWP explicitly requires this and contractors must provide a Certificate of Workers’ Compensation Insurance to consumers before work begins.

• Classify workers correctly (employees vs. subcontractors)

• Use only licensed subcontractors (DCWP makes this extremely clear. Subcontractors must hold their own HIC license when doing home improvement work.

• Control and supervise employees directly (which is part of the definition of “employee” in the exam guide.

If you call someone a 1099 but treat them like an employee, you’re violating tax law, labor law, and DCWP rules at the same time. Triple risk.

3. The Legal Tests (Translated Into Contractor Language)

IRS Test: “Behavioral, Financial, Relationship”

The IRS looks at three buckets:

Behavioral control

You’re controlling:

• Their schedule

• Where they work

• How they do the work

• What tools/equipment they use

If yes → W-2 employee.

Financial control

Ask:

• Do they invoice you?

• Do they buy their own tools/equipment?

• Can they make a profit or loss?

• Do they work for other clients?

If no → W-2 employee.

Relationship

Look for:

• Ongoing, indefinite work

• Benefits

• Full-time expectations

If yes → W-2 employee.

4. NYC/DOL/Workers’ Comp Test

New York State is even stricter than the IRS.

The state heavily presumes someone is an employee unless:

• They are truly independent

• They operate a legitimate business

• They control how the work is performed

• You are not supervising their day-to-day work

• They supply their own tools and equipment

• They take on business risk

• They can and do work for others

If your “1099” works like a regular crew member → they’re an employee, period.

5. What is a 1099 Subcontractor?

A legitimate subcontractor is a business, not a worker.

They should:

• Have their own HIC license if they perform home improvement work (DCWP requirement)

• Work under their own business name

• Carry their own liability insurance

• Carry their own workers’ comp (or have their own exemption)

• Invoice you per project, not per hour

• Control their own schedule and methods

• Supply their own tools, materials, and labor

• Advertise their services to the public

• Work for multiple clients

If they don’t meet these criteria, they’re not a subcontractor. They’re your employee.

6. What is a W-2 Employee?

An employee is someone who:

• Works under your supervision (DCWP describes employees as under the direct supervision and control of the employer.

• Uses your tools

• Follows your schedule

• Performs ongoing, integral work for your business

• Cannot subcontract their work

• Works only for you (or primarily for you)

• Isn’t running their own business

If that’s your setup, they must be W-2.

You must:

• Pay payroll taxes

• Withhold income taxes

• Carry workers’ comp (DCWP requires this; exemptions only apply to owners.

• Provide a W-2 at year-end

7. The NYC HIC Twist Most Contractors Miss

DCWP and the Home Improvement Examination Guide explicitly differentiate employees from subcontractors:

“A subcontractor is an individual in business for himself… An employee works for wages and is under the employer’s direct supervision and control.”

This means:

• Your helper who rides in your van, uses your tools, follows your instructions, and works only for you?

  → Employee (W-2), not a 1099.

• The licensed electrician you bring in for panel upgrades?

  → Subcontractor, not an employee.

This distinction is baked directly into the HIC exam.

8. Common Misclassification Mistakes

NYC contractors get flagged for these constantly:

Paying day laborers on 1099

Illegal if you’re directing their work.

Issuing 1099s to your “crew”

If you control their work, they’re employees.

Hiring an unlicensed “subcontractor”

If they perform home improvement work without a DCWP HIC license, you’re in violation.

Treating someone as 1099 because they asked

Worker preference is irrelevant. Law decides their status.

Assuming workers’ comp exemptions apply to non-owners

They do not.

9. Compliance Checklist for NYC HICs

If someone is a W-2 employee, you must:

• Withhold payroll taxes

• Pay employer FICA

• Carry workers’ comp insurance

• Report wages to the IRS

• Follow NYS labor laws (overtime, breaks, etc.)

• Supervise them directly

(DCWP explicitly states contractors must cover employees with Workers’ Comp and report wages to IRS.

If someone is a 1099 subcontractor, they must:

• Hold their own DCWP HIC license (if doing HIC work)

• Work independently without your supervision

• Supply their own tools/materials

• Invoice you

• Carry their own insurance

• Control their own schedule

• Be able to take other clients

If any of these are missing → they’re likely an employee.

10. Red Flags That Trigger Audits

Expect attention from state agencies if:

• You have “1099s” who look like employees

• You have workers on 1099 but list no subcontractors in your contracts

• You claim a workers’ comp exemption but still use non-owner labor

• You pay most labor as 1099

• You don’t collect W-9s or COIs from subs

• You don’t use licensed subs

Remember: your Workers’ Comp carrier, the state, and DCWP all share data.

11. How to Stay Out of Trouble

1. Use subcontractors only for specialized, licensed work

(Electricians, plumbers, licensed HIC subcontractors)

2. Put regular crew on payroll

If they work like employees, treat them as employees.

3. Always collect proof of coverage from subs

Workers’ comp, liability, HIC license.

4. Make sure your contracts comply with DCWP rules

DCWP requires contracts to state that you will provide Certificates of Workers’ Comp insurance and that you will obtain all required permits.

5. Understand you are responsible for your crew

Consumers can file complaints and DCWP enforces.

12. Bottom Line

NYC contractors get in the most trouble by pretending every worker is 1099.

If you supervise them, supply their tools, set their schedule, and rely on them as part of your crew, they’re a W-2 employee — and every agency will treat them that way.

Use subcontractors only when they:

• Are licensed,

• Are truly independent,

• And operate real businesses.

Otherwise, hire them properly.