Texas Contractor Resources

Employee vs. Subcontractor: What Your Carrier Needs to Know

How you classify your workers directly affects your premium, your audit, and whether a claim gets paid.

Carriers don’t just take your word for it. At audit time, they review payroll records, 1099s, contracts, and job descriptions to determine how your workers were actually classified — and charge accordingly.

Why It Matters to Your Carrier

Your GL and WC premiums are calculated based on payroll (employees) and subcontractor costs (uninsured subs). Misclassify workers — intentionally or not — and you could face a large audit bill, a disputed claim, or worse, a coverage gap when something goes wrong on the job.

How Carriers Define Each

Employee

  • On your payroll (W-2)
  • You control when, where, and how they work
  • Uses your tools and equipment
  • Works exclusively (or primarily) for you
  • No separate business entity

Subcontractor

  • Paid via 1099 or invoice
  • Controls their own work methods
  • Uses their own tools
  • Works for multiple clients
  • Has their own business/license
The IRS test matters here too. If the IRS would classify someone as an employee based on behavioral control, financial control, and relationship type — most carriers will as well. Don’t assume 1099 status protects you.

How It Affects Your GL Premium

GL policies for contractors typically rate on payroll or revenue. Uninsured subcontractor costs are often added to your exposure at audit — sometimes at a higher rate than employee payroll.

  • Employees — included in payroll, rated at your class code rate
  • Insured subs (have their own GL/WC) — usually excluded or rated at a lower rate; you must have their COI on file
  • Uninsured subs — added to your exposure, often rated at a premium surcharge; some carriers refuse to cover them at all

How It Affects Your Workers’ Comp

Texas is unique — WC is not mandatory for most private employers. But if you carry it, the same classification rules apply. Uninsured subs performing work similar to your employees may be pulled into your WC payroll at audit.

If a worker without their own coverage is injured on your site and a carrier determines they were functionally an employee, the claim may land on your policy — and your rate.

Texas opt-out trap: Some contractors skip WC entirely and rely on subcontractor status to avoid coverage obligations. If a court or carrier later determines those workers were employees, you could face direct liability for injury costs with no policy to absorb them.

What to Disclose on Your Application

Be specific and accurate when applying. Carriers ask:

  • Total annual payroll (employees only)
  • Total subcontractor costs paid in the past year
  • Whether subs carry their own insurance
  • What type of work subs perform

Underreporting subcontractor costs is one of the most common audit triggers. It’s not worth it — the additional premium at audit is always higher than disclosing upfront.

Best Practice: Build a Simple Sub File

For every subcontractor you use, keep on file:

  • Their current COI (GL + WC)
  • A signed subcontractor agreement
  • Their license number (if applicable)
  • Proof they carry their own tools/equipment

This protects you at audit and at claim time. A carrier that sees a clean sub file is far less likely to dispute classification.

Have subs? Let’s make sure you’re covered right.

A specialist can review your setup and make sure your policy matches how you actually operate.

Check Online Quote EligibilityCall 210-640-7050