How should I track employee labor vs. subcontractor labor in job costing?
Employee labor and subcontractor labor both end up as job costs, but they take completely different paths through your books. Treating them the same or lumping them into one account makes it impossible to see your true costs per job and creates real compliance problems.
Employee labor flows through payroll. When your crew works on a job, you record their hours against that specific job. But the hourly wage isn’t your full cost. You also pay employer payroll taxes (Social Security, Medicare, FUTA, Virginia SUTA), workers compensation insurance, and any benefits like health insurance or retirement contributions. These added costs are your labor burden. Most construction companies calculate a labor burden rate as a percentage on top of the base wage and apply it to every hour charged to a job. If your burden rate is 30% and you pay a worker $25 per hour, your true labor cost to the job is $32.50 per hour. Without that burden calculation, every job looks more profitable than it actually is.
Subcontractor labor works differently. You receive an invoice from the sub, code it to the correct job, and pay it through accounts payable. There’s no burden to calculate because subs handle their own taxes, insurance, and benefits. Their invoice amount is your full cost. You’ll issue a 1099 at year end for any sub you pay $600 or more during the year.
In your accounting software, set up separate cost of goods sold accounts for each type. Something like “COGS - Employee Labor” and “COGS - Subcontractor Labor” at a minimum. Both get assigned to the specific job, but keeping them in distinct accounts lets you see the composition of your costs on any given project. A job that’s 80% subcontractor labor has a very different risk and margin profile than one that’s 80% employee labor, even if the total cost is the same.
The classification itself matters more than most business owners realize. Calling someone a subcontractor when they’re actually functioning as an employee is a serious compliance risk. Virginia takes workers compensation violations seriously, and the IRS has its own tests for worker classification. If you’re telling someone when to show up, providing their tools, and directing how the work gets done, that person is likely an employee regardless of what your agreement says. Getting this wrong can mean back taxes, penalties, and liability for unpaid workers comp premiums.
Set this up correctly from the start. Configure your chart of accounts with separate labor categories, use job costing features in QuickBooks to assign every labor dollar to a project, and calculate your burden rate at least quarterly so it reflects your actual costs. If your books are already running without this separation, a Northern Virginia small business bookkeeping service that understands job costing can help restructure your accounts and get your job-level reporting where it needs to be. Accurate labor tracking is the foundation of knowing which jobs actually make you money.
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