W-2 vs 1099 Checklist: Employee or Independent Contractor?
Misclassifying a W-2 employee as a 1099 independent contractor is one of the most common — and most expensive — small business HR compliance mistakes. Use this checklist, based on IRS and U.S. Department of Labor guidance, to gut-check each worker relationship. No single answer decides it; weigh the overall picture.
Does your business have the right to direct and control how the worker does the work? More 'yes' answers point to W-2 employee.
- You set the worker's hours and schedule
- You require the work to be done at your location or on your systems
- You provide training on how to do the job
- You give detailed instructions about tools, methods, or sequence
- You evaluate the details of how the work is performed (not just results)
Who controls the economic aspects of the worker's job? More 'yes' answers point to 1099 independent contractor.
- The worker has a meaningful investment in their own tools or equipment
- The worker can realize a profit or loss based on managerial skill
- The worker is free to offer services to other businesses in the market
- The worker is paid by the project or deliverable, not by the hour or salary
- The worker covers their own unreimbursed business expenses
What does the ongoing relationship look like on paper and in practice? More 'yes' answers point to W-2 employee.
- There is no written contract, or the contract describes an employment relationship
- The worker receives benefits (PTO, health insurance, retirement)
- The engagement is open-ended rather than tied to a specific project
- The worker performs services that are a core part of your regular business
- You can terminate the relationship at will without breach of contract
If most behavioral-control and relationship items are "yes", the worker is likely a W-2 employee. If most financial-control items are "yes" and the other categories are mostly "no", a 1099 independent contractor classification is more defensible.
When unsure, file IRS Form SS-8 for an official determination, or consult an employment attorney before making the hire. State rules (notably California's ABC test) can be stricter than federal guidance.
This guide is informational and does not constitute legal advice.