Contractor vs Employee
Correct classification is the foundation of 1099 compliance. Understand the federal rules that distinguish independent contractors from employees.
1099-NEC
W-2
Independent Contractor
1099 FormA business entity or individual providing services under specific contract terms.
Key characteristics:
- Controls how work is performed
- Sets own work schedule
- Provides own tools and equipment
- Can work for multiple clients
- Pays own self-employment taxes
- Receives no employee benefits
Employee
W-2 FormA person working under the direct control and supervision of an employer.
Key characteristics:
- Employer controls work process
- Set schedule by employer
- Employer provides tools/workspace
- Typically works for one employer
- Employer withholds all taxes
- May receive benefits (health, PTO)
Classification Factors
The IRS and Department of Labor use a "totality of the circumstances" approach. No single factor is determinative.
Behavioral Control
- Instructions provided
- Training methods
- Evaluation systems
Financial Control
- Equipment investment
- Unreimbursed expenses
- Profit/loss opportunity
Relationship Type
- Written contracts
- Employee benefits
- Permanency of role
Warning: Misclassification Risks
Misclassifying employees as contractors can result in massive penalties, unpaid back taxes, and legal issues. When in doubt, always seek professional tax advice.