Workers – Are they 1099 or W-2?

Properly classifying workers as either independent contractors (1099) or employees (W-2) is a critical decision for businesses. While paying a worker as a contractor may seem easier, misclassification can lead to audits, penalties, and compliance issues with the IRS and state agencies. Employers often prefer 1099 workers to reduce payroll costs, while workers may favor W-2 status for tax and benefit advantages. The key factor in classification is control—who dictates how, when, and where the work is performed. This article breaks down the essential guidelines to help businesses navigate worker classification and avoid costly mistakes.

The Dilemma

Should you just cut a check to a worker as a subcontractor (easy) or put them on payroll as a W-2 employee (hard)? 

The Background 

Worker classification is a hot topic.  The IRS and states who want to insure employee rights to Social Security, Medicare, unemployment benefits, worker compensation insurance, etc.   Audits are conducted and can result in penalties.  Employers prefer 1099 workers to avoid payroll taxes and payroll administration.  Workers prefer W-2 employment to avoid having to pay the employer share of payroll taxes, since self-employed contractors pay both employee and employer shares.  

     Employee:  Pays 7.65% Social Security/Medicare Employer matches another 7.65%. 

     Self-Employed Contractor: Pays both halves or 15.3% on net income after business expenses. 

Guidelines 

The main issue is who controls the worker.  Are they truly an independent business person contracting with a client, or is an employer in control? Factors to consider: 

• Instructions: An employee complies with instructions about when, where and how to work and tools to use. An employer has the right to control how the work results are achieved.  
• Training: An employee may be trained to perform services in a particular manner. Independent contractors control their own methods and receive no training from their client.  
• Integration: An employee’s services are usually integrated into the business operations. An employee is subject to direction and control.  
• Services rendered personally: An employee renders services personally. This shows that the employer is interested in the methods as well as the results. An independent contractor can hire, supervise and pay assistants under a contract that requires provision of  materials and/or labor and be responsible only for the result.  

Notes:  

Part-time, seasonal, and temporary workers may be classified as W-2 employees.    

Before paying a subcontractor, get their Form W-9 to determine if a 1099 filing will be needed. 

Need Help? Worker classification can be complex, and missteps can lead to serious consequences. If you need assistance determining whether your workers should be classified as employees or independent contractors, contact us for expert guidance.