Subcontractor Compliance: The Documents to Collect Before You Pay

Leverage Disappears the Moment You Pay

Everything in this article is easy to collect before the first payment and genuinely difficult afterwards. A subcontractor waiting on money will send you a W-9 within the hour. The same subcontractor, paid in full and on to the next job, may take weeks — or never respond at all.

So the rule is not complicated: the documents are a condition of the first payment, not a follow-up task. What follows is what to ask for and why each one protects you.

The W-9, and Why It Is Not Optional

You need a completed W-9 from every subcontractor to report payments correctly at year end. It gives you the legal name, entity type and taxpayer identification number.

Entity type matters because it determines whether a 1099 is required at all. Payments to most corporations are exempt from 1099-NEC reporting, but payments to individuals, partnerships and LLCs generally are not — and "they have an LLC" does not settle it, since an LLC can be taxed several different ways. The W-9 tells you which.

Without a W-9 you have two problems: you cannot report accurately, and you may be required to apply backup withholding. Both are avoidable by collecting one form up front.

Certificates of Insurance Are Where Real Exposure Sits

A certificate of insurance evidences that the sub carries coverage. It matters for two reasons — if they injure someone or damage property, their policy should respond rather than yours; and your own general liability and workers compensation audits will look for it.

That second point catches contractors out. At audit, payments to subcontractors without evidence of their own coverage are commonly reclassified as if those workers were yours, and premium is charged accordingly. Contractors receive five-figure audit bills for this regularly, long after the job closed and the money was spent.

Three things to actually check on the certificate, rather than filing it unread:

• Coverage dates. A certificate that expired mid-job covers nothing for the rest of it. Policies need tracking to expiry, with renewals chased.
• Limits. They should meet what your contract and your own insurer require.
• Additional insured status. If your contract requires it, confirm it is actually endorsed rather than merely mentioned.

Licences, Agreements and Waivers

Where the trade requires licensing, verify it is current and covers the work being performed. An unlicensed sub can invalidate permits and, in some jurisdictions, affect your own standing.

A signed subcontract agreement should exist before work starts, setting out scope, price, payment terms, insurance requirements and indemnity. Work performed on a handshake is the single largest source of disputes I see, and the party with less documentation generally loses.

Then lien waivers with each payment, and final waivers before releasing retainage. Paying out retainage without final waivers in hand removes your leverage while leaving the lien exposure intact.

Worker Classification Is a Separate Risk

Calling someone a subcontractor does not make them one. If a worker functions like an employee — you control how and when the work is done, they use your tools, they work only for you — a tax authority may reclassify them regardless of the label, with back taxes and penalties attached.

The tests vary by jurisdiction and some states apply stricter standards than federal rules. The practical signal is dependence: a genuine subcontractor runs a business, carries their own insurance, works for others, and controls their own methods. Where you are uncertain, it is worth resolving with a professional rather than assuming, because the liability accrues quietly and surfaces years later.

Make It a Checklist, Not a Memory

A short onboarding checklist per subcontractor, completed before the first payment clears, handles nearly all of this: W-9 on file, current certificate of insurance with correct limits and additional insured status, licence verified where required, signed agreement, and a waiver schedule agreed.

Then one recurring task — a monthly check for certificates expiring within thirty days. That single review prevents the audit reclassification problem almost entirely.

January is the wrong time to discover you are missing six W-9s. If your subcontractor files are incomplete heading into year end, we can help you get them in order while the leverage still exists.