1099 vs W-2

Classifying Workers the Right Way

One of the most common mistakes small business owners make is misclassifying their workers. The IRS distinguishes between employees (who receive a W-2) and independent contractors (who receive a 1099). Misclassifying employees can result in significant fines, penalties, and back taxes.

The key difference lies in control:

• Employees: Employers have the right to control not only the results of the work, but also the methods used to complete it. Employees are typically subject to a set schedule and work under the supervision of the employer.

• Independent Contractors: Contractors have more freedom in how and when they complete their tasks. The employer provides the work but does not control the methods.

The IRS uses a 20-factor test to determine whether someone is an employee or independent contractor. Factors include the level of control, relationship length, financial arrangement, and the nature of the work. If you are unsure, filing IRS Form SS-8 can help clarify the classification.

Misclassification can result in back taxes, penalties, and even lawsuits, so always ensure that you are classifying your workers correctly. Consult a tax professional or use IRS resources to make the right call.