Quick Answer
A workforce paid on 1099s costs less than the same workforce on W-2s: no employer payroll taxes, no workers compensation, no benefits, no overtime. If the arrangement does not hold up, that savings is the gap between the earnings you were sold and the earnings you will run. Classification turns on how the work is actually done, not on what the paperwork says, and the tells are absences: no mileage reimbursement, no comp premium, no signed agreements, no invoices from the contractors. Determinations belong to an attorney or a CPA, and the exposure going forward is yours from day one.
The staffing page says eleven contractors and two employees.
Read that again as a cost structure instead of a staffing choice. Eleven people generating revenue, and the business pays no employer payroll taxes on them, carries no workers compensation for them, provides no benefits, owes no overtime, and files no W-2s.
That is a lower cost of labor than the business across the street running the same trade with employees. Some of the earnings you are buying come from that difference.
So the question is whether the arrangement holds up. Not whether the paperwork says contractor. Whether the work is done the way contractors do it.
What the work looks like when it is not what the paperwork says
Classification turns on how much control the company has over the work and whether the worker is in business for themselves. The tests vary by agency and by state, and the determination belongs to an attorney or a CPA. What I look at is how the days run.
Who sets the schedule. If the company assigns routes and the worker takes what they are given, that is control.
Whose truck. A company vehicle with the company name on the side, assigned to one person, is a company tool.
Who trained them. Contractors arrive with their trade. Employees get taught the company’s way of doing it.
Who else they work for. A contractor with one client that fills their week is not running a business, they are working a job.
Who sets the price. If the company tells the customer the rate and tells the worker the split, the worker is not pricing their own work.
Any one of those is a question. All five together describe an employee.
The absences that give it away
Classification does not show up as a line item. It shows up as a set of lines that are not there.
No mileage reimbursement anywhere in three years of financials, for people driving to calls every day. Real contractors bill their own vehicle costs into their rate. Workers who are handed a truck and a route do not.
No workers compensation premium for most of the headcount.
No benefits line. No payroll tax line proportional to the number of people doing the work.
No signed agreements with any of the contractors. No certificates of insurance on file. No invoices from them, because the company calculates the pay and sends it.
That last one is the cleanest tell I know. A contractor invoices you. If your office is computing what to pay a contractor the same way it computes payroll, you have payroll.
What the correction costs
On a deal I looked at, eleven technicians were paid as 1099 contractors with company scheduling, company vehicles, company training, and exclusive work. No one had written any of it down as a problem.
Priced corrected, the arrangement came to about $157,300 a year. Payroll taxes at $86,300, workers compensation at $49,000, benefits at $22,000.
That number was not hidden in the financials. It was absent from them, because the structure that creates those costs was absent. And the asking price was a multiple of earnings that did not carry it.
Who gets a vote, and when
The federal picture has been moving. The Department of Labor stopped enforcing its 2024 independent contractor rule in May 2025 and proposed replacing it in February 2026 with an economic reality test closer to the 2021 version. That proposal is not final. The 2024 rule still applies in private lawsuits.
None of which changes much for a buyer, because the federal wage rule is one of several authorities and usually not the one that finds you.
The IRS has its own common law test. States run their own, and a number of them apply a stricter standard where a worker counts as an employee unless the company can prove otherwise. Your state unemployment agency and your workers compensation agency each make their own determination, on their own timeline.
And none of those agencies go looking. They get triggered.
A technician gets hurt on a job and there is no comp coverage. A contractor you let go files for unemployment, and the state asks why no wages were reported. Someone files a form with the IRS asking to have their status determined. A worker talks to a plaintiff’s attorney about unpaid overtime going back years.
Each of those starts with one person having a bad week, and the business you bought is the one that answers for it.
Why it lands on you
How much of the prior exposure transfers depends on the deal structure and on your state. That is a conversation for your attorney and your CPA, and it is one to have before closing rather than after.
What is not ambiguous is the forward half. From day one, the arrangement is yours. If you keep running it the way the seller did, you are the one making the classification decision now. If you fix it, your labor cost goes up by something like that $157,300, against debt service calculated on earnings that assumed the cheaper version.
Both roads cost money. The seller took the savings for twenty years and sold you the earnings they produced.
There is a version of this where the contractors are genuine. Licensed trades with their own trucks, their own insurance, their own other clients, invoicing you for work they bid. That business exists and it is a different thing. The difference is visible in a week of watching how the work gets assigned.
Count the people generating revenue in the business you are looking at. Then find them in the payroll register. If the numbers do not match, you have found the cost that is not in the price.