Three sheets you can copy below: a loaded cost worksheet that turns an agreed wage into what the hour really costs you, the questions that decide whether someone is an employee or a subcontractor, and a before-the-first-day checklist.
None of this is tax or legal advice, and the parts that vary – which forms, which rates, which thresholds – genuinely vary by state and by year. Take the sheets to an accountant once and you will not need to ask again. What follows is the shape of the decision, not the answer to it.
The first hire costs you twice
The wage is the number you negotiate, and it is not the cost. Hiring the first person costs you twice: once in money, and once in your own hours.
The money part is the one people half expect – payroll taxes, workers compensation, tools, PPE, the phone, the fuel. Added up, the true cost of an hour is well above the rate you agreed, and in construction it is the comp premium that does most of the damage.
The second cost is the one nobody plans for. For the first month or two, your own billable hours go down. You are supervising, checking, driving back to fix something, and standing next to someone instead of working. If you have already worked out your recovered-per-hour figure from tracking your own time, you can put a number on that, and it is usually bigger than the wage difference people agonise over.
That is not an argument against hiring. It is an argument for hiring when there is enough confirmed work to carry both costs, rather than hiring to create capacity and hoping the work follows.
Employee or subcontractor is not a choice you make
Calling someone a subcontractor does not make them one. Classification is a conclusion drawn from how the work actually happens, and it is assessed after the fact – by a tax authority, a labour department, or an insurer processing a claim.
The rough shape is control. If you set the hours, direct how the work is done, supply the tools and the vehicle, and they do not really work for anyone else, that arrangement looks like employment whatever the paperwork says.
Getting it wrong is expensive because it is applied backwards. Unpaid payroll taxes, unpaid comp premiums and penalties can be assessed across the whole period, not from the date somebody noticed. And if an uninsured person is hurt on your site and is later found to have been an employee, that is not a paperwork problem.
The specific tests differ between the tax authority and the state labour department, and they do not always agree with each other. This is the one question on this page that is genuinely worth paying an accountant for, once, before the first pay run.
For the federal side of that question, the IRS page on independent contractor or employee sets out the factors used, and it is worth reading before the conversation rather than instead of it. If you do not have an employer identification number yet, the IRS employer identification number page explains what it is and how to apply. Your state labour department applies its own test on top, and the two do not always agree.
What the wage actually costs
Fill this in with your own figures before you agree a rate, not after. The bottom line is the one that matters.
LOADED COST OF ONE EMPLOYEE
Worker _______________ Trade ______________ Start ______
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THE WAGE
Hourly rate agreed $ ______
Expected hours per week ______
Overtime expected, hours per week ______
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ON TOP OF THE WAGE - fill in your own figures
Employer payroll taxes ____ % $ ______
Workers compensation premium ____ % $ ______
Classification code ________
(in construction this is the big one, and the rate
follows the work actually performed)
Any required benefits or leave ____ % $ ______
Payroll service or software, per pay run $ ______
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WHAT THEY NEED THAT YOU PAY FOR
Tools and consumables, first month $ ______
PPE, boots, hi-vis, hard hat $ ______
Phone or radio $ ______
Vehicle, fuel, or travel allowance $ ______
Training, tickets, inductions $ ______
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WHAT IT COSTS YOU IN YOUR OWN TIME
Supervision, hours per week ______
Rework and checking, hours per week ______
Payroll and admin, hours per pay run ______
Your own hours x your recovered rate $ ______
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A Wage cost per week $ ______
B Everything else per week $ ______
C TRUE COST PER WEEK A plus B $ ______
Divide C by their productive hours: $ ______
THAT is what the hour costs you, not the rate
you agreed.
Break-even: they must generate more than C in billable
work every week, and in the first month they will not.
Nobody is productive from day one. Build the first month in at a fraction of full output, and have the money for two pay runs sitting in the account before the first day. Payroll is the one bill that cannot wait for a client to pay you.
The classification sheet
Work through it honestly, then take the answers to someone qualified. The point of the sheet is not to give you a verdict – it is to make sure the conversation with your accountant takes ten minutes instead of an hour.
EMPLOYEE OR SUBCONTRACTOR - THE QUESTIONS THAT DECIDE IT
This is not a choice you make. It is a conclusion drawn from
how the work actually happens. Answer honestly, then take the
answers to an accountant or your state labour department.
CONTROL
[ ] Do I set their hours?
[ ] Do I tell them how to do the work, not just what
the result should be?
[ ] Do I decide the order tasks are done in?
[ ] Do they need my permission to take a day off?
TOOLS AND MATERIALS
[ ] Do I supply the tools?
[ ] Do I supply the vehicle?
[ ] Do I buy the materials?
BUSINESS OF THEIR OWN
[ ] Do they work for anyone else?
[ ] Do they advertise, or have their own customers?
[ ] Do they carry their own insurance?
[ ] Do they hold their own licence where one is needed?
[ ] Can they make a loss on a job, or only earn an hourly
amount?
PERMANENCE
[ ] Is the arrangement ongoing rather than for one job?
[ ] Is what they do the core of what my business sells?
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More ticks in the first, second and fourth blocks point
toward employee. More ticks in the third block point toward
a genuine independent business.
No single answer decides it, the paperwork does not decide
it, and calling someone a subcontractor in a contract does
not decide it either. Getting it wrong is assessed
backwards, with the taxes and penalties applied to the
whole period.
Take this sheet to an accountant before the first pay run,
not after a review.
Before the first day
Boring, and it is the difference between a first week that goes fine and one that costs you a client.
BEFORE THE FIRST DAY
PAPER
[ ] Written offer: rate, hours, start date, what the job
actually is
[ ] Whatever tax and identity forms your jurisdiction
requires, completed and filed - ask an accountant
which ones, once
[ ] Emergency contact and any medical condition I need
to know about on site
[ ] Tickets and licences sighted and copied, with expiry
dates written down
INSURANCE AND REGISTRATION
[ ] Workers compensation in place and the classification
code correct for the work they will do
[ ] Liability insurer told the headcount changed
[ ] Vehicle insurance covers them driving, if they will
MONEY
[ ] Pay day and pay period decided, and told to them
[ ] Payroll set up and test run completed before the
first real one
[ ] Money for the first two pay runs already in the
account
SITE
[ ] Induction: hazards, exclusion zones, who to call
[ ] PPE issued, and it fits
[ ] Told what to do when something goes wrong, in words,
not a document
ME
[ ] I have blocked out supervision time and accepted
that my own billable hours drop this month
[ ] I know what work they will do in week one, not
"we will see how it goes"
FREE DOWNLOAD
All 3 sheets above, as one printable PDF
PDF · 6 KB · Real tick boxes and a notes area. Made to print and keep in the truck.
Workers comp is the number that surprises people
Workers compensation is priced off a classification code, and the code follows the work actually performed – not the job title you give someone, and not the trade on your licence.
In construction the spread between codes is enormous. Office and low-risk work sits at a small percentage of payroll. Roofing, framing, structural steel and anything at height sit far higher, and in the worst codes the premium is a substantial fraction of the wage itself. This single number decides whether the hire makes sense.
- Get the code confirmed before you agree a rate, not after the policy is written. Your insurer or broker can tell you in one phone call.
- If they do two kinds of work, ask how that is treated. Some jurisdictions allow split classification with proper records; others rate everything at the highest code performed.
- Audits happen. Comp premiums are usually estimated at the start of the year and reconciled against actual payroll later. A cash-flow surprise at audit time is common and entirely avoidable if you accrue for it.
- Subcontractors without their own cover can land on your policy. Ask your insurer what evidence they need from anyone you engage, and collect it before the work, not at audit.
The apprentice route
An apprentice is cheaper per hour and slower per hour, and the trade-off is not the one people assume. The real cost is your time – an apprentice needs teaching, and teaching comes out of your billable day.
It also comes with obligations that a general hire does not: a registered training arrangement, wage progressions tied to stages, and rules about what they may do unsupervised. Those are set by your state and by the trade, and by the programme you register with.
The honest version: take an apprentice when you have steady work and the patience to teach, not when you want cheap labour. The wage looks like a bargain and the supervision hours are not. What the intake actually scores, from the other side of the table, is in the apprentice electrician resume guide.
What a pay run actually involves
Once a fortnight or once a week, forever:
- Hours in, checked against the job. This is where the weekly time sheet earns its keep – hours with no job number cannot be costed to anything.
- Gross pay calculated, including any overtime, allowances or travel.
- Deductions worked out and withheld – what these are and at what rate is jurisdiction-specific, and it is the part you set up once with an accountant and then never think about again.
- The withheld money moved out of the working account the same day. It is not yours. Treat it exactly like the tax you set aside for yourself.
- Payment made on the day you said it would be. Late payroll is how you lose a good person, and reputation in a trade travels fast.
- Records kept. How long, and in what form, is set by your jurisdiction – ask once, then follow it.
The pattern to notice: every one of those steps is a place where a number gets typed in twice. Hours from a sheet into a pay run, pay run into your books, books into a tax filing. That is the argument for a system, and it is the same argument as everywhere else in this line of work.
Frequently asked questions
Can I just pay cash for a few days work?
Paying someone off the books removes every protection you have if they are injured, and the liability does not disappear because the payment was informal. It is also the arrangement most likely to be reclassified later. This is not a grey area worth exploring.
Do I need workers comp for one person?
In most places yes, and in construction often from the first employee regardless of size. Confirm with your state – it is a one-call question, and the consequence of assuming wrong is not a fine, it is an uninsured injury claim.
What if they already have their own ABN or licence?
It helps, but it does not settle the question by itself. Someone can hold their own registration and still be an employee in substance if the control and exclusivity point that way. Work through the classification sheet above.
How much work do I need before hiring is safe?
Enough confirmed work to cover the true weekly cost from the worksheet, with your own reduced billable hours factored in, for longer than you think. Hiring against a pipeline of maybes is how people end up carrying payroll out of savings.
Should the first hire be a labourer or a tradesperson?
Depends on what is actually the bottleneck. If you are spending your day on work anyone could do, a labourer buys back your hours cheaply. If you are turning down jobs because you cannot be in two places, that needs someone qualified, and it costs accordingly.
Related guides
- Contractor time tracking and bookkeeping – the job cost sheet and the recovered-per-hour figure this page relies on
- Contractor estimate template – three you can copy, including the exclusions sheet
- Invoice template for contractors – time and materials, progress billing, change orders
- Going independent as a tradesperson – the order to do things in, and when not to
Doing it yourself, or paying someone
For one employee, doing it by hand is possible. Plenty of people do. What makes it unpleasant is not the arithmetic – it is that the rules change, the filing deadlines are fixed, and the penalties for being late are not proportional to the size of the business.
The two realistic options are a payroll service, which handles the calculations, the filings and the payments for a monthly fee, or an accountant who runs it for you, which costs more and comes with somebody to ask. Doing it yourself is the third option and it is the one that quietly costs the most, because the hours are yours.
What to look for if you go the software route: it should file and pay on your behalf rather than just calculating, handle the workers comp reporting your state requires, and let the hours you already record become the pay run without retyping. Anything that stops at “here is what you owe, now go and pay it” has left you the part that goes wrong.