Don't Hire a Contractor Without These Documents

TLDR
Before work starts, collect the contractor’s W-9 and proof of general liability. Get proof of workers comp or a valid exemption. Check the required licenses and permits; friendship does not change the exposure.

Table of Contents

The Four Documents

I’ve been a real estate investor and a GC for 15 years. I have flipped over 300 houses and paid literally hundreds of contractors. Here are the four document categories I check before work starts.

  1. W-9. This gives you the taxpayer information used for contractor reporting. Confirm the current 1099 rules with your tax professional and the IRS information-return guidance instead of relying on a dollar threshold in an old video.
  2. General liability evidence. Get the certificate and have your broker confirm the coverage, insured name, dates, and job fit. A certificate is not a promise that every kind of damage is covered.
  3. Workers comp evidence. Get the certificate or the valid exemption your jurisdiction allows. A homemade waiver is not the same thing.
  4. Required licenses. Confirm the business, occupational, and trade licenses that apply to the company, person, location, and work.

The source uses “business license,” “personal license,” and trade license in ways that can blur together. They are not interchangeable. None by itself proves employment authorization. Check the local rule instead of guessing from the label.

Why I Focus on Workers Comp

General liability and workers comp do different jobs. The policy language controls. Ask your broker which policy applies to the actual job. Ask about damage, injuries, and subcontractors.

Workers comp is for covered worker injuries. Do not skip the check for coverage or a valid exemption.

Here is the scenario. A contractor has a guy working for him. The guy climbs on your roof and falls. He breaks his neck. His family sues. The contractor has no money and no workers comp policy. So the family walks up the chain looking for money. Who has money? The guy who owns the real estate.

Workers comp is meant to respond to covered worker injuries. If the contractor lacks required coverage, the owner and others up the chain can face serious exposure. The exact result depends on the facts, policy, and local law.

Common Mistake
Do not skip workers comp evidence because the contractor “seems like a good guy.” Trust does not establish coverage. Verify the certificate or valid exemption with the people responsible for the insurance and local requirements.

Why GCs Care So Much About This

As a GC, I hold general liability and workers comp policies and get audited. The auditor looks at the people I paid. If I cannot document a subcontractor’s coverage, my policy may charge for that exposure at audit.

Different trades carry different rates. In the source example, I estimate that an undocumented $10,000 roofing payment could add about $3,000 at audit. Those are rough figures from my experience, not universal rates.

An investor without a workers comp policy may not face that same audit, but an injury can still create exposure. Have the insurance broker and local professional confirm what your project requires before anyone starts.

Who Needs a License, and What Kind

At minimum, separate business registration from trade authorization.

Business or occupational license. This may allow a company or sole proprietor to operate in a city or county. The required name and document vary by jurisdiction.

Trade or contractor license. This may authorize a person or company to perform regulated work or pull a specific permit. Building, electrical, plumbing, and hvac permissions are not automatically the same.

If you act as your own GC, you are responsible for checking the people you hire. If you hire a GC, the GC may collect documents from subs. You still verify that the required permits for your property were issued. Local rules decide who may pull each one.

Pro Tip
I have been able to verify trade licenses through state search tools where I have worked. Search the issuing authority by company and license number. If a contractor will not identify the license they claim to hold, stop and verify before work begins.

Verify the Permit, Not the Promise

I have paid people who said they could pull permits. They finished the work without pulling them. The owner’s problem did not disappear because the contractor made the promise.

Check the permit record with the issuing authority before covered work starts. Keep checking through the required inspections. If work is hidden too early, the city may require walls to be opened. That happened on my own projects.

Permit check: A license search shows a credential. A permit record shows whether the job was actually permitted. Verify both when the work requires both.

The Process: How to Collect Without Looking Like a Jackass

Leading with paperwork can derail the negotiation. The contractor may think you do not trust him. Prices can go up and schedules can get weird. You do not want that.

Here is the order I work in.

  1. Walk the property. Do the scope of work in three ways: written, verbal, and on video.
  2. Ask for the price. Only the price. We are not talking about schedule or paperwork yet.
  3. If the price works, talk pay schedule. How many checkpoints, how much at each checkpoint.
  4. Now collect and verify the four document categories before work starts. Tell them clearly: the job cannot start and I cannot cut a check until the required paperwork is in hand.

Mention the documents during recruiting so nobody is surprised. A verbal “yes” is not the verification. The real gate is seeing the current documents and checking them before work begins.

Let them know up front: no required documents, no start, no check. As a GC, I also have to prove the paper trail to my insurance auditor every year.

My Rule: Do Not Prepay Labor

The money is the power in this game. Not in a negative way. These contractors have ten things going on, and you get put on the back burner the second the money leaves your hands.

A lot of contractors are going to ask for money upfront. Here is the script: “I can’t pay upfront. I have been burnt too many times. I am not doing it. I can set up a pro account at Home Depot for materials. When you pick them up, I pay the store by phone.”

That way he is not fronting material cost, and you are not fronting labor.

Breaking Down the Pay Schedule

If it is a new contractor and trust is not there yet, break the project into very small checkpoints. “How about we settle up at the end of every day you are on site? You did the work we agreed on, here is the check.”

I would not run a long-term relationship that way because it burns too much bandwidth. But for a new guy, breaking the checkpoints down shows that you are a good payer, which is the reputation you want. Over time, bigger checkpoints, less overhead, same money flow.

Key Concept
An unpaid milestone gives you immediate control. Protect it. My rule is not to prepay labor that is not complete.

The Cash Discount Trap

A contractor says the job is $10,000, or $9,000 if you pay cash. The payment method is not the tax issue. An actual business expense does not vanish merely because it was paid in currency, but it still needs support. The IRS recordkeeping guidance says business-expense records should identify the payee, amount, proof of payment, date, and what was purchased.

The trap is trading the paper trail for the discount. If “cash” means no invoice, no W-9, no receipt, or no required report, your books no longer show the real rehab cost. You may also create tax and compliance problems. My example was trying to show that a hidden expense makes the books show more profit. The tax-rate math in the video is not a universal calculation.

If you accept a real discount, record the actual $9,000 payment. Collect the required tax details and follow the current reporting rules. Use QuickBooks or another ledger so you can prove the cost and learn what work really costs. Confirm the treatment with your tax professional.

FAQ

Do I really need all four documents on every contractor, even my friend who helps me for a weekend?

I use the same document gate instead of assuming friendship changes the exposure. Do not assume either person’s homeowner policy covers paid work. Have your insurance professional confirm the actual policies and job setup before work starts.

What do I do if a contractor does not have a workers comp policy?

Pause the hire and verify what coverage or exemption the trade and jurisdiction actually require. I accept a valid workers comp exemption where it is allowed; that is not the same as a waiver you write yourself. Confirm the certificate or exemption with your broker and local authority.

How do I verify a trade license?

Use the issuing state or local authority’s search. In the recording, I say every state where I have lived offered an online lookup, but the issuer and search method vary. Search the company and license number, and verify before work begins.

What’s the right first payment amount on a new contractor?

Do not pay for work before it happens. The source uses daily payment as one possible trust-building example for a new contractor, not a universal schedule. Agree on checkpoints in the bid package and pay promptly when each named checkpoint is complete.

Just starting out. Does this process feel like overkill for one house?

Do not let the whole pile of paperwork stop you from learning the business. My close is to handle the acute items now: insurance evidence, licenses, permits, the written scope, and the pay schedule. Then keep building the skills that produce profitable deals. Tax planning can become more detailed as the business actually earns profit.