As your business grows and you bring on help, one of the first big questions is: are they an employee (W-2) or an independent contractor (1099)? Get it wrong and the penalties can be steep — so let's make it clear.
The IRS looks at how much control you have over the worker, across three areas:
| Looks like an employee (W-2) | Looks like a contractor (1099) |
|---|---|
| You set their schedule | They set their own hours |
| You provide tools & training | They use their own tools |
| Works only for you, ongoing | Serves multiple clients |
| Paid hourly/salary | Paid by project/invoice |
For employees, you withhold income tax, pay half of their Social Security and Medicare, and may owe unemployment tax. For contractors, you generally just issue a 1099-NEC. Treating an employee like a contractor to skip those obligations is the kind of thing that triggers back taxes, interest, and penalties if you're caught.
We help you classify each role correctly, set up compliant payroll for your employees, and handle the year-end W-2s and 1099s so nothing slips. See our payroll services or ask us about a specific role.
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