To become a subcontractor, you set up a legal business, obtain any trade license your state requires, buy the insurance general contractors will demand before letting you on a job site, register with the IRS for tax purposes, and then start bidding on work. Subcontractors are independent businesses hired by a general (prime) contractor to handle a specialized portion of a larger job — most often in construction, IT, and facility maintenance. The steps below cover each requirement in the order you should tackle them.
Know What a Subcontractor Actually Is
The IRS draws a sharp line between employees and independent contractors, and subcontractors fall on the independent side. An employee works under a business that controls both what gets done and how it gets done. A subcontractor controls their own methods, tools, and schedule; the hiring party only controls the end result.1Internal Revenue Service. Worker Classification 101: Employee or Independent Contractor Getting this wrong has real consequences: a worker treated as a subcontractor when they should be an employee misses out on minimum wage, overtime, and other protections under the Fair Labor Standards Act.2U.S. Department of Labor. Misclassification of Employees as Independent Contractors Under the Fair Labor Standards Act
In practice, that means as a subcontractor you set your own hours, supply your own equipment, and can work for multiple general contractors at once. You also take on obligations employees never face: paying your own taxes, carrying your own insurance, and chasing your own payments.
Set Up a Legal Business Entity
Before you can take work, you need a formal business. The two common starting points are a sole proprietorship and a limited liability company.
A sole proprietorship is the simplest setup. You and the business are legally the same, and there is no formation paperwork beyond any local registrations your jurisdiction requires. The downside is that your personal assets — home, savings, vehicles — are on the hook if the business is sued or takes on debt.
An LLC creates a legal wall between your personal finances and the business. If the company faces a lawsuit or cannot pay a bill, your personal assets are generally protected. State filing fees for an LLC range roughly from $35 to $500, and most states require you to file articles of organization with the Secretary of State.
If you plan to operate under a name other than your full legal name, you typically need to register a fictitious business name (also called a “doing business as” or DBA) with your state or county. Individuals doing business under their own full name usually skip this step.
Get an EIN From the IRS
An Employer Identification Number is a nine-digit number the IRS assigns to businesses for tax reporting. You need one if you form an LLC, hire employees, or simply want a business tax ID separate from your Social Security number.3Internal Revenue Service. Employer Identification Number Most banks also require an EIN to open a business checking account.
The fastest route is the IRS online application at IRS.gov, which issues the number immediately at no cost. You can also apply by fax or mail using Form SS-4, though processing takes longer.3Internal Revenue Service. Employer Identification Number Be wary of third-party sites that charge a fee for what the IRS provides free.
Get Licensed in Your Trade
Many subcontracting trades — electrical, plumbing, HVAC, roofing, and others — require a state-issued license before you can legally perform the work. Requirements vary widely. Some states license dozens of specialty trades, while roughly a third of states have no general contractor licensing requirement at all. Check with your state’s contractor licensing board (sometimes called a Contractor State License Board, or CSLB) to find out what applies to your trade.
Where licensing is required, you can generally expect to document several years of verifiable work in the trade (often backed by references from licensed contractors), pass an examination covering both technical and business-and-law fundamentals, and pay both exam and application fees. Exam fees alone range from roughly $130 to $450. Renewal is usually required every one to three years, and many states mandate continuing education credits.
Working without a required license can result in fines, criminal misdemeanor charges, and the inability to enforce payment through the courts for unlicensed work. Get licensed before you start bidding.
Line Up Insurance
Nearly every general contractor will ask for proof of insurance before letting you on a job site. Insurance protects you, the general contractor, and the property owner from financial losses caused by accidents, damage, or errors during the project.
General Liability
General liability covers claims for bodily injury and property damage during your operations. If a client trips over your equipment or you accidentally damage existing plumbing, this is the policy that responds. Most contracts require a minimum of $1,000,000 per occurrence, and many also require a $2,000,000 aggregate limit. You prove coverage by providing a Certificate of Insurance to the general contractor before work begins.
Workers’ Compensation
If you hire employees, virtually every state requires workers’ compensation insurance. It covers medical costs and lost wages if a worker is injured on the job. Even if you operate as a sole proprietor with no employees, some general contractors and project owners still require a workers’ comp policy, or at minimum a waiver or exemption certificate from your state. Rules on sole-proprietor exemptions vary, so check with your state’s workers’ compensation board.
Other Coverage Worth Considering
Professional liability (also called errors and omissions) covers claims arising from mistakes, faulty advice, or design flaws if your work involves design, engineering, consulting, or other professional judgment. Architects, engineers, and IT consultants commonly need it.
An equipment floater (inland marine) protects your tools and mobile equipment against theft, fire, and damage while they are on job sites or in transit. Standard commercial property insurance only covers gear at your listed business address.
Premiums depend on your trade, payroll, and claims history. They range from a few hundred dollars a year for a low-risk sole proprietor to several thousand for a firm with employees in a high-hazard trade. Getting quotes from multiple carriers and asking about bundled policies helps keep costs manageable.
Handle Your Taxes
Nobody withholds income or payroll taxes from your checks. You calculate and pay them yourself throughout the year.
Form W-9
Before a general contractor pays you, they will ask you to fill out IRS Form W-9 with your business name, address, and taxpayer identification number.4Internal Revenue Service. About Form W-9, Request for Taxpayer Identification Number and Certification Fill it out accurately. If the information is wrong or missing, the general contractor must withhold 24% of every payment and send it to the IRS as backup withholding.5Internal Revenue Service. Instructions for Form W-9 (Rev. March 2024)
Form 1099-NEC
General contractors who pay you $2,000 or more during the tax year must report those payments on Form 1099-NEC and send you a copy by January 31 of the following year.6Internal Revenue Service. 2026 Publication 1099 The threshold increased from $600 for prior tax years. Payments under $2,000 from a single client may not generate a 1099, but you still owe taxes on all income regardless of whether you receive a form.
Self-Employment Tax
Employees split Social Security and Medicare taxes with their employer. As a self-employed subcontractor, you pay both halves, a combined rate of 15.3% on the first $184,500 of net earnings for 2026 (12.4% Social Security plus 2.9% Medicare).7Social Security Administration. If You Are Self-Employed Net earnings above $184,500 are subject only to the 2.9% Medicare tax since the Social Security portion caps out. You can deduct half of your self-employment tax when calculating adjusted gross income, which reduces your income tax.8Internal Revenue Service. Topic No. 554, Self-Employment Tax
Quarterly Estimated Taxes
Because no one is withholding, the IRS expects estimated tax payments four times a year using Form 1040-ES. For the 2026 tax year, the deadlines are April 15, 2026; June 15, 2026; September 15, 2026; and January 15, 2027. You can skip the January 15 payment if you file your 2026 return and pay the full balance by February 1, 2027.9Internal Revenue Service. Form 1040-ES Missing these deadlines triggers an underpayment penalty tied to an interest rate the IRS sets each quarter (7% for the first quarter of 2026).10Internal Revenue Service. Quarterly Interest Rates
Deductions to Track
Self-employed subcontractors report income and expenses on Schedule C. Common deductions include vehicle expenses (the standard mileage rate for 2026 is 72.5 cents per mile, plus parking and tolls), tools and supplies, insurance premiums, licensing and continuing education, and a home office if you use a dedicated space exclusively and regularly for business. The simplified home office method allows $5 per square foot, up to 300 square feet, for a $1,500 maximum.11Internal Revenue Service. Tax Guide for Small Business (For Individuals Who Use Schedule C) Keep receipts for everything. Good bookkeeping makes tax season simpler and protects you in an audit.
Find Work and Bid on Projects
With your business set up, licensed, and insured, the next step is landing work. Most subcontracting work comes through relationships. Attending trade association events, joining local builder groups, and reaching out directly to general contractors in your area are effective ways to get on bid lists. Once a general contractor trusts your work, they often call you first for future projects without a formal bidding process.
Larger projects, especially government-funded ones, use a formal solicitation. You may encounter a Request for Proposal (RFP), which evaluates both qualifications and price, or an Invitation to Bid (ITB), which awards the contract to the lowest qualified bidder. Both require reviewing the project plans carefully and submitting a detailed cost breakdown for materials, labor, equipment, and overhead. Track your actual costs on completed projects so your future estimates get sharper.
If you want to work on federal projects, you need a Unique Entity Identifier (UEI). Prime contractors that receive federal awards cannot pay a subcontractor who lacks one. You obtain a UEI through SAM.gov. First-tier subcontractors need the UEI but are not required to complete the full SAM.gov registration that prime contractors must maintain.12eCFR. Part 25 Unique Entity Identifier and System for Award Management
Understand Surety Bond Requirements
On larger projects, particularly public works, you may need to provide surety bonds. A surety bond is a three-party guarantee: a bonding company promises the project owner that you will fulfill your contractual obligations. If you fail, the surety covers the cost. Three types come up in subcontracting.
A bid bond guarantees that if your bid is accepted, you will sign the contract. If you back out, the bond covers the difference between your bid and the next lowest bidder. A performance bond protects the owner if you fail to complete the work; the bonding company covers the cost of hiring a replacement. A payment bond ensures that your own subcontractors and suppliers get paid; if you fail to pay them, they can claim against the bond.13Defense Acquisition University. Bonds in Construction Contracting
Under the Miller Act, federal construction contracts over $100,000 require performance and payment bonds.14Office of the Law Revision Counsel. 40 U.S. Code 3131 – Bonds of Contractors of Public Buildings or Works The Federal Acquisition Regulation currently sets the practical threshold at $350,000, the simplified acquisition threshold as of October 2025.15Acquisition.gov. Threshold Changes – October 1st, 2025 Many state and local governments have similar bonding requirements, and even on private jobs a project owner may require bonds from subcontractors on high-value scopes.
Read the Subcontract Before You Sign
Before you pick up a tool or write a line of code, you sign a subcontract. Reading every clause carefully is not optional. A few provisions deserve special attention.
Flow-Down Clauses
A flow-down clause takes an obligation from the prime contract and passes it to you. These can cover safety requirements, project timelines, insurance minimums, and dispute resolution procedures. On federal contracts, certain clauses are mandatory flow-downs. Read each one so you know what standards you are agreeing to meet.
Pay-When-Paid and Pay-If-Paid
Two contract terms shift the risk of nonpayment onto you. A pay-when-paid clause is a timing mechanism: the general contractor pays you within a certain period after they receive payment from the owner. If the owner is slow, your check is slow, but you eventually get paid. A pay-if-paid clause creates a true condition: the general contractor only owes you if and when the owner pays them. If the owner never pays, you may have no claim against the general contractor at all. Enforceability of pay-if-paid clauses varies by state, with some refusing to enforce them on public policy grounds. Know which type your contract contains and what your state’s law says.
Indemnification
An indemnification clause requires you to cover the general contractor’s legal costs and damages if claims arise from your work. A broad version could make you responsible even for losses partly caused by the general contractor’s own negligence. Many states limit these clauses, some prohibiting indemnification for another party’s sole negligence, but the restrictions vary. If you see language requiring you to “defend, indemnify, and hold harmless” the other party, understand exactly how far that obligation extends before signing.
Notice to Proceed
After both parties sign, you typically cannot start work until you receive a formal Notice to Proceed. This confirms the site is ready, the schedule is set, and your contract clock has started.16Acquisition.gov. 52.211-10 Commencement, Prosecution, and Completion of Work Do not mobilize crews or order materials until you have it in hand.
Protect Your Right to Get Paid
Getting paid is the most common headache in subcontracting. Legal tools exist to help, but most require you to act before a dispute arises.
In most states, subcontractors must send a preliminary notice to the property owner (and sometimes the general contractor and lender) early in the project to preserve the right to file a mechanic’s lien later. Deadlines run from 20 days after you start work to several months after the project ends, depending on the state. Missing the window can permanently forfeit your lien rights, so check your state’s deadline as soon as you take on a project.
A mechanic’s lien is a legal claim against the property where you performed work. If you are not paid, the lien can force the property owner to address the debt before the property is sold or refinanced. Filing requirements — deadlines, notice procedures, allowable claim amounts — vary by state.
On federal projects covered by the Miller Act, you cannot place a lien on government property. The payment bond is your remedy instead. A first-tier subcontractor can file a claim against the payment bond after 90 days of nonpayment but no later than one year after the last day labor was performed or materials were supplied. A second-tier subcontractor must also send written notice to the prime contractor within 90 days of the last work performed to preserve the right to sue on the bond.17U.S. General Services Administration. The Miller Act Missing these deadlines can leave you with no practical way to recover what you are owed.