1099 or W-2: classifying the people who work for you
Every growing trades business reaches the point where it needs more hands, and the first instinct is often to pay someone as a 1099 contractor because it looks simpler and cheaper. Sometimes that is correct. Often it is not, and the difference is not a matter of what the paperwork says but of how the work actually happens. Getting it wrong exposes you to back taxes, penalties and interest — and in several states to liability that reaches the owner personally.
Control is the deciding factor
Under the federal test the IRS looks at behavioral control, financial control and the type of relationship. If you set the hours, direct how the work is done, supply the tools and the vehicle, and the person works only for you, they look like an employee regardless of what the agreement is titled.
Several states — California, Massachusetts, New Jersey and others — apply the stricter ABC test instead. There, even a genuinely independent business fails if the work falls within your own usual line of business: a plumbing company subcontracting plumbing work will not pass, however independent the sub is. Check your state before relying on the federal test.
What a genuine subcontractor looks like
Their own business entity, their own insurance, their own tools, several customers, and control over how they complete the work. If you would be uncomfortable with them sending a substitute, they are probably not a subcontractor.
The real cost difference is smaller than it looks
Employees carry payroll taxes, workers’ compensation and unemployment insurance. Genuine subs charge more per hour precisely because they carry those themselves. The gap is usually narrower than the sticker prices suggest.
Keep the paperwork current
W-9 on file before the first payment, certificate of insurance current, payments tracked through the year. Chasing a W-9 in January from someone you last saw in June is a familiar and avoidable scramble.
Common questions
- What happens if I get it wrong?
- Back payroll taxes, penalties and interest — and several states add their own on top.
- Can someone be both?
- Rarely, and it invites scrutiny. Pick one relationship and be consistent.
- When is the 1099 due?
- By January 31 of the following year, to both the worker and the IRS — and only for payments of $600 or more. Payments to corporations, and anything paid by card or through a payment processor, are not reported by you; those go on a 1099-K from the processor.