W-2 vs 1099 classification

The tests that decide it

The IRS applies its common-law test grouped around behavioural control, financial control and the nature of the relationship. For wage-and-hour purposes the Department of Labor's position is in transition: the 2024 six-factor economic realities rule stopped being enforced in 2025, a proposal to replace it with a modified, core-factors version was published in February 2026 and is not yet final. States can be stricter again: California's ABC test presumes employee status unless the hirer proves all three prongs, and several states apply ABC tests to wage claims. The direction across all of them is the same: substance over label.

What misclassification costs

Back taxes and penalties (the employer's share of FICA plus withholding failures), unpaid overtime and minimum wage under the FLSA, retroactive benefits eligibility, workers' compensation and unemployment insurance assessments, and class-action exposure where a whole category of workers was labelled alike. The 1099 relationship is cheaper only while it is genuine; a re-characterised workforce is the expensive kind of savings.

The design question underneath

The defensible structures start from the work, not the tax outcome: genuinely project-based scope, contractor control over method and schedule, their own tools and clients, and an absence of the management apparatus (reviews, rosters, exclusivity) that signals employment. If the role needs managing like an employee, classify it like one and let the cost-to-company arithmetic be honest, because the misclassification discount is a contingent liability, not a saving.