1099 vs. W-2: Getting Worker Classification Right

Behavioral control: do you direct how and when the work is done? Financial control: does the worker have unreimbursed expenses, the ability to profit or lose, and tools of their own? Relationship: are there benefits, written contracts, or an expectation of continuing work?

The more control you exert, the more likely the worker is an employee.

Several states (California, Massachusetts, New Jersey, others) apply a stricter ABC test that presumes employee status unless three specific conditions are all met. A worker can be a contractor federally and an employee at the state level.

1099 contractors filing for unemployment. A single contractor receiving most of their income from one business. Contractors working set hours on your premises. State tax department information sharing.

Back federal payroll taxes (employer and employee share). Back state withholding. Unemployment and workers' comp liabilities. Penalties and interest. In many states, treble damages or class-action exposure.

Review every 1099 relationship annually against both tests. When in doubt, move the worker to W-2 or restructure the engagement to genuinely meet contractor criteria. Document the analysis.