Principal Place of Business – Your Subcontractors are your Employees Without One

What is a Principal Place of Business?  – The difference between your hiring a Subcontractor and an employee.


If you don’t have wording in your contract requiring your subcontractor is to have a Principal Place of Business, have a picture of your Subcontractor’s Principal Place of Business and a receipt of actual costs paid by the business for that Principal Place of Business, the registered contractor you hire is your employee.  This may include getting a redacted (with the numbers blacked out) IRS tax return showing the Principal Place of Business was taken as an IRS tax deduction.

Under the Independent Contractors laws (RCW 51.08.195 and 51.08.181) there is a 7 point test that has to do with verifying whether an Registered Contractor that works for you is a “worker” (employee) or Independent Contractor (business or subcontractor).  If they are determined to be a worker, the hiring Firm owes Worker’s Comp Premiums (plus huge penalties and interest, based on dollars, not on hours worked), Employment Security premiums, and potentially all the associated IRS taxes.  L&I will tell you they are only looking for Worker’s Comp, but the Washington State laws now over lap, and if the Registered Contractor is determined to be a “worker”, you owe the additional taxes and premiums.

A registered contractor MUST MEET ALL 7 POINTS of the test to be considered an Independent Contractor, and the hiring firm must PROVE (both in Contract and Fact) that the registered contractor you hire meets the test with EVIDENCE.

In this article we are only focused on Part 2 (c) – typically, the Flooring Industry can’t pass parts 2(a) and 2(b) due to L&I interpretations, so they are left with Part 2 (c) to verify contractors.

In upcoming articles we will discuss some of the other common tests Hiring Firms and Subcontractors don’t know about that are causing L&I to reclassify their Independent Contractors as employees.  And the fact is that almost all subcontractors without employees are being re-classified as “workers”.

RCW 51.08.181  “Worker” — Registered contractor and electrician exclusions.  (Part 2 ONLY)

For the purposes of this title, any individual performing services that require registration under chapter 18.27 RCW or licensing under chapter 19.28 RCW for remuneration under an independent contract is not a worker when:

(2) (a) The service is either outside the usual course of business for which the service is performed, (b) or the service is performed outside all of the places of business of the enterprise for which the service is performed, or the individual is responsible, (c) both under the contract and in fact, for the costs of the principal place of business from which the service is performed;

Let’s take a look at the concept of Principal Place of Business, and yes, your subcontractor must have one to be considered a business.

“Principal Place of Business”

If your subcontractor claims his or her Principal Place of Business is a “home office” it must meet the IRS definition.  (see

 Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

      • as your principal place of business, or
      • as a place to meet or deal with patients, clients or customers in the normal course of your business, or
      • in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

If your subcontractor claims a ‘mobile headquarters’ as their Principal Place of Business then the following criteria should be met.

 “If a contractor has a mobile headquarters in its van with client records, computer, printer, equipment, tools and inventory with records proving it is paying all costs for the van. “

 “Under the Contract”

Put some form of this wording out of the law into your contract.  An example would be: “The Subcontractor both under the contract and in fact, for the costs of the principal place of business from which the service is performed for the duration of the contract”. 

In audits, L&I has been tagging Hiring Firms for “under the contract” even if they ask and verify the Principal Place of Business in their contract by a question and the subcontractor affirms they have one.

 “And in Fact”

You must prove the Subcontractor has a Principal Place of Business and they are all paying the costs associated with it.  Proof could include the following:

Home office or storage:

  • provide phone, utility, internet, or rental receipt for the use of your home office or storage facility.
  • IRS Tax return Profit and Loss or Itemized Home Office Deduction (amounts can be blacked out) (this also meets Test 3 (b) so its the best solution

Mobile Headquarters:

  • Van payment or receipt for the cost of the van paid by the business
  • Insurance costs receipt paid the by the business (cancelled check)
  • Picture of client records and bookkeeping activities in the van.

Storefront or Rented Office:

  • Rental or Lease contract for facility

Get it in Writing from Labor and Industries

This article was simply meant to inform you of audit results based on Principal Place of Business.  Following the recommendations above may not be proof at the time of your audit.  We recommend you gather this information, call a local Labor and Industries office, and have them pre-verify the Subcontractor in writing.  If you get other advice from Labor and Industries and you don’t get it in writing, assume they will re-classify your Independent Contractor as a worker or employee, even if an individual auditor or account representative says differently.

Also, remember this is just one of the 7 Point test under RCW 51.08.181.  If your subcontractor does not meet all 7 tests, they will be re-classified as an Independent Contractor.

If your Subcontractors or you have questions contact: