GC Exposed when Sub Changes Entities?

Chris Brashear, CFO & CPA   May 5, 2026

Are you at Risk When a Sub Changes Entities?

If you have hired and subsequently paid a sub-contractor, you have probably been challenged with maintaining the documentation necessary to qualify them as a sub and assure liability and workers compensation coverage. The issue is that the sub has changed entity names through your state, and in many instances has done so to avoid either debt or legal liability.    This often happens without the knowledge of the general contractor, who continues to interact and pay the sub through the original entity name.

IRS Sees 1099 Subcontractors as Highly abused System

The federal government intensely perceives the abuse of the 1099 subcontractor system—commonly known as worker misclassification—as a major issue. It is considered a form of tax evasion and labor law violation, resulting in billions in lost tax revenue annually. Understood to be a major factor in lost revenues, legacy systems have prevented effective scrutiny and enforcement.

New IRS Systems May allow for greater accountability.

As of mid-2024, the IRS operates roughly 346 legacy IT systems, with many over 256 years old. 107 identified as candidates for retirement, with some systems as old as 64 years! The IRS has been limited in its ability to enforce based on outdated systems.                                               

Past IRS efforts to Modernize Unsuccessful

The IRS has been in the modernization process since the 1970’s, and despite tens if not hundreds of millions of dollars spent has been slow going. Attempts have often resulted in schedule delays, cost overruns and minimal achievements.

The GAO (General Accounting Office) has identified 4 systems in the federal government in most need of modernization. Three of these are utilized by the IRS. Two identifiable are the Business Master File (BMF) and the Integrated Data Retrieval System (IDRS).

IRS working Alongside DOGE Taking Steps to Integrate and Improve Collection

With a renewed mandate to identify and eliminate waste fraud and abuse, the DOGE is spearheading efforts to include overhauling the 50-year-old Integrated Data Retrieval System (IDRS) and implementing AI-driven enforcement. Key steps to improve integration and collection are:

IDRS Overhaul: A "national real-time tax processing," system which allows for faster identification of errors or fraud.

"Mega API" Development: Across all aging systems the API would allow for the integration of data from multiple sources to identify waste, fraud, and non-compliance.

Enterprise Case Management: Workflows to a single enterprise case management system to reduce reliance on older, fragmented mainframe systems.

AI-Driven Audits: Leveraging AI to scan tax returns and identify potential tax evaders more efficiently, specifically focusing on high-income taxpayers and complex business structures.

 

How Could This affect the General Contractor?

Unpaid Supplier/Labor Debt (Mechanic's Liens): If a subcontractor shuts down one entity to avoid paying suppliers or employees, those suppliers or workers can file a mechanic's lien on the project, forcing the GC to pay twice to clear the title.

Safety and Workers' Comp Liability: If 1099 contractors change entities and drops their worker's compensation coverage (claiming no employees), the GC may be held responsible for injuries or medical expenses if that worker is injured on the site.

Voided Insurance Policies: If a GC contracted with "ABC Contracting" (who had valid insurance) and that company changes to "XYZ Contracting" without updating the COI (Certificate of Insurance) to name the new entity as an additional insured, the GC has no liability coverage.

In conclusion, every contractor who hires subcontractors is aware that there are holes in the system that enables our current working environment. New levels of scrutiny may be on the horizon for the IRS. Now more than ever, it is imperative to have good accounting and administration systems to document and track every sub-contractor you do business with. 

Action Items: Update your sub contractor workflow to include the items below:

1)       Require the sub-contractor to add you to the notification email list for any changes to the entity with your state. Verify the name of the entity you are contracting with in the state business entity portal and make sure they are current and in good standing. 

2)  Add a personal guarantee to your subcontractor agreement. While not standard in all contracts, GCs may demand this to ensure personal liability if the company defaults.

Sample Clause: "In consideration of the GC entering into this Subcontract Agreement with Subcontractor, the undersigned Guarantor [Name] hereby personally, unconditionally, and irrevocably guarantees the full and prompt performance of all obligations, covenants, and payments required by the Subcontractor under this Agreement. This is a guarantee of payment and performance, not merely of collection.

  

Direct any comments or questions to Chris Brashear, cbrashear@constructcpa.com

WinGateFinancial

Notice to Lender Could Be the Step that Makes the differences.

By Chris Brashear • May 3, 2026
Make the Mechanic's Lien Effective with One Extra Step

Does A LienLok free Notice of Intent Create Payments

By Chris Brashear • January 20, 2025
A Mechanic’s Lien is one of the most powerful tools afforded to a contractor when payment is in jeopardy. Although there are various process quirements from state to state, all require a documented and tracked notification to the payor. This notification allows the payor to verify the information, and if that the owed amount is accurate. The letter serves as official notice that the payee intends to encumber the property where the work was performed. A Notification of Intent to Lien has very specific requirements that must be adhered to in order to preserve the Mechanic’s Lien rights. If a notice is missing critical format or data, then the Mechanic’s Lien can be declared faulty and may not be effective. Because the time window for the Mechanic’s lien is so narrow, when a mistake is made, the potential right to protect oneself can be eliminated altogether. The timing regarding when a mechanic’s lien can be utilized differs somewhat by state, usually from 60 days to 120 days from the date of last work on the project. An effective Notice of Intent to Lien must either be delivered by personal service or by registered mail with a return receipt requested. The attempt must be made at the last two known addresses of the payor. It must also be served upon property owner at least 10 days before the lien is filed. The content of the Notice of intent to file is also prescribed and must include a clear intent to file the lien should payment not be made. A specific deadline for the payment to be made and the amount owed, including the detail for any fees or interest being included.. The property where the work was performed mustbbe clearly described with an accurate legal description as designated by the county property assessor. Here is an example. R1963786 Parcel 095903419002 GR WMW19-2 L2 BLK 19 WESTMOOR WEST. Win gate Financial Partners has built an internal system for filing mechanic’s liens and is excited to offer a FREE legally compliant Notice of Intent to File” introductory offer. By simply loading your documents regarding the debt into our online Lien Lok portal. Win Gate Financial will prepare and deliver a Notice of Intent to Lien anywhere in the United States. This alone may encourage payment. If payment has not been forwarded, LienLok will reach out to you at or about the 10th day to see if you would like to move the lien forward. Wingate can at that point execute the mechanic’s lien for you and your Team for one low price. Again there is no obligation to move this forward and we look forward to hearing from you and offering this value add feature to any contractor in the United States!
A wooden ladder is sitting in the doorway of a brick building under construction.

The Difference Between WinGate Instant Asset Funding & Factoring

By Chris Brashear • October 28, 2024
Wingate goes where no factoring company has ever dared to go! Predictivity is a necessity for a financial services firm offering invoice factoring. If you hope to survive in this industry, definable variables, such as selling price, typical vendor payment terms and a planned profit margin flow through to an understood formula that can help assure profitability. We see this in practice with most factoring firms pursuing the market segments where these factors can be controlled with little unexpected variance. Enter Wingate Financial Wingate has chosen to offer cash to contractors who are not only waiting to be paid, but are waiting for the insurance industry to pay the customer, who will then ultimately pay Wingate. Not only is the timing of the payment unknown, but in many cases, not even the amount being purchased from the contractor has been fully established yet. “This is precisely the reason Wingate sees an opportunity to serve the contractor who is paid largely from insurance carrier claims, like a roofer or a restoration specialist.” A project can be completed for months before the details can be reviewed by an insurance carrier and then the negotiation ensues. This delay can cause unexpected cash valleys for the contractor. Wingate has acquired the skills to be able to review a “pending” payout in as little as 2 hours and make a cash payment to the contractor in 24 hours. Most offers are north of 90% of the latest approved claim amount. Never been this simple with no credit inquiry, or personal information needed. This is a specialty tool for your financial guru to have in her arsenal for when those very intense and unplanned cash deficits surface. Three simple documents are loaded, and cash is in your account by tomorrow. To our knowledge Wingate is the only financial services firm smoothing cash flow cycles for the insurance claim contractor. If you would like to discuss a potential payout or just ask a few questions, please call Chris Brashear directly at 970-617-4189.