The Risks of 1099 Contractors: What Every Business Owner Should Know

If you’re a business owner who works with 1099 contractors, chances are you’ve been told how simple it is: no payroll taxes, no benefits, no long-term strings attached. 

On the surface, hiring 1099 contractors seems like a clean, cost-effective solution. 

But beneath the surface? It’s riskier than most people realize. 

At Ellerbrock-Norris, we work with business owners across industries who rely on independent contractors and subcontractors – and we’ve seen what happens when those relationships aren’t handled strategically. From surprise claims to compliance nightmares, a small misstep can lead to big consequences.

Let’s talk about the most common misconceptions – and what you need to know to protect your business. 

“1099 Contractors Aren’t Employees So I’m Not Responsible.” 

It’s one of the most dangerous assumptions a business owner can make. 

The idea that hiring a 1099 contractor removes your liability is a half-truth at best. If that contractor causes property damage, injures themselves or someone else on a jobsite, your business may still be held accountable. 

Think of it like this: even if someone isn’t on your payroll, they’re still representing your brand on the job. And when something goes wrong, fingers point fast. 

What does this look like in real life? 

• A subcontractor falls off a ladder on your site and doesn't carry workers’ comp. Your business may end up paying the claim. 

• A contractor installs something incorrectly, causing injury or damage. If your contract doesn't clearly shift liability – or if you’re not listed as an additional insured on their policy – you could be dragged into a lawsuit and left to cover the costs yourself. 

Just because someone isn’t on your payroll doesn’t mean they aren’t your problem.  

“My 1099 Contractor Said They Have Insurance. That’s Enough, Right?” 

This is another major blind spot.  

Many business owners request a Certificate of Insurance (COI) from their 1099 contractors and call it good. While COI’s are important, they aren’t protection – they’re just a snapshot in time.  

If a contractor lets their insurance lapse, reduces coverage limits or cancels it altogether, you may not know until after an incident occurs. And unless you're actively tracking expiration dates and requiring updated documentation, you're flying blind. 

That’s why subcontractor verification should be treated as an ongoing process – not a one-time task. 

A strong system might include: 

• Initial documentation review (COIs, W-9s, subcontractor agreements, licenses) 

• Defined insurance requirements based on job type and risk 

• A central tracking system for expiration dates and renewals 

• Regular follow-ups to confirm coverage hasn’t changed 

• Clear contract language that outlines liability, indemnification, and proof of coverage 

• Confirmation that your business is listed as an additional insured on the contractor’s policy 

This kind of process doesn’t just reduce risk – it builds accountability into your operations. And when something does go wrong, it gives you the paper trail to protect your business. 

“1099 Contractor Misclassification? That Doesn’t Apply to Me.” 

Misclassification is one of the most common – and costly – compliance violations in business today. 

And here’s the kicker: your intent doesn’t matter. 

Even if you believe someone is a contractor, the IRS or DOL may disagree. If you control how, when and where the work is done… if the contractor doesn’t have their own business… if they’re performing the same work as your employees… you could be misclassifying, even if you didn’t mean to.  

The penalties? They add up very quickly. Think back wages, back taxes, unpaid overtime and legal fees. Depending on the state you operate in, you could also be exposed to class-action lawsuits or lose eligibility for certain contracts and licenses. 

Misclassification doesn’t always come from bad actors – it often comes from outdated practices or assumptions. The best safeguard is a proactive approach: one that keeps up with shifting rules, documents working relationships clearly and closes the gaps before they turn into liabilities. 

You can review the most current IRS version of worker classifications here.  

Where 1099 Contractor Risk Shows Up in Your Business 

The risk tied to 1099 contractors doesn’t end with compliance. It bleeds into nearly every part of your operation: 

• Safety: Are your subs trained to your standards? Are they aligned with your internal safety protocols – or could they be driving up your risk of injury and your workers’ comp premiums? 

• Business continuity: What happens if your subcontractor disappears mid-project? Do you have a plan or does the entire timeline collapse? 

• Reputation: If a subcontractor cuts corners, your clients won’t blame them. They’ll blame you. What’s your plan? 

• Insurance: If you don’t have clear documentation, you might be absorbing risk you thought was transferred. 

• Contractual obligations: Many GC agreements require proof of subcontractor insurance, training and compliance. If you’re not meeting those terms, you’re putting future projects at risk. 

That’s why managing 1099 contractors isn’t just a compliance issue – it’s a strategic one. 

How to Build a Smarter Strategy Around 1099 Contractors 

At Ellerbrock-Norris, we believe in building long-term risk strategies that evolve with your business – not just patching up problems after they happen. 

When it comes to 1099 contractors, our advisors oversee the: 

• Reviewing and updating of contract language so liability is clearly outlined 

• Auditing of subcontractor classifications to ensure they’re legally compliant 

• Creation of real-time systems for tracking Certificates of Insurance 

• Alignment of your safety and training protocols across all workers, not just employees 

• Connection of subcontractor risk to the bigger picture – including insurance, compliance and business continuity 

Because a truly effective risk strategy doesn’t live in silos. It considers how each piece –your people, your contracts, your benefits, your operations – affects the next. That’s what we call holistic risk management. And it’s what helps our clients stay protected and positioned for growth. 

If you’re unsure whether your 1099 contractor relationships are exposing you to unnecessary risk, we can help you find out before it turns into a costly surprise. 

Ready to protect your purpose? Let’s chat.