Hi and welcome to JA. I am Ray and will be the expert helping you tonight.
Let's go through your questions.
1) Right now I carry a standard workers compensation policy and all my employees are covered. If I sub-contract this out to someone else and they do not have insurance what happens if someone tries to file a claim. For example, an employee of his gets bit by a snake on the job site (a $50,000 hospital bill!). Will my workers compensation cover it?
No it will not it only covers your employees.So here you would have to have proof the contractor here has workers comp.You would want to verify that at least monthly.
Basically, what is my liability? Also, many people get workers comp "insurance" and it is nothing but "ghost insurance"....basically a paper for him to submit. But if I have this paper have I done my due dilegence and I'm covered?
The 1099 subcontractor has to have their own coverage.Otherwise you may personally be liable for any injuries here.Insist on him having it and proof of it monthly.
2) What are my tax liabilities if they are deemed an employee not 1099 subcontractor by the department of labor?
You could be penalized for back wages, employer withholding, overtime , etc. It could be real costly here.You might want to rethink this, lots of risks.Maybe you could have them as employee with some kind of base wage plus completion bonus and then you cover them as employees for comp here and avoid 1099 audit issues as well.
I appreciate the chance to help you tonight.Please let me know if you have more follow up.Thanks again.