Calling a worker a contractor does not make them one. The IRS and DOL look past the label and the 1099 to the reality of the relationship: who controls how the work is done, who supplies the tools, who bears the financial risk, and how permanent the arrangement is. When the reality says employee, the label is just evidence of the violation.
This guide lays the comparison out visually: the characteristics of a genuine W-2 relationship — employer control, tax withholding, benefits — against a genuine 1099 relationship — independence, self-supplied tools, invoiced work. It covers why classification matters financially and legally, and what an audit of your current contractor relationships should look for.
Who should use this guide
- Business owners paying regular workers on 1099s to simplify payroll
- Growing companies converting contractors into their first employees
- Nonprofits using contract staff for ongoing program work
- Anyone signing 1099 agreements written by the worker’s last employer
What it helps prevent
- IRS back taxes, penalties, and interest on misclassified workers
- DOL wage claims for unpaid overtime a ’contractor’ was never eligible for
- Unemployment and workers’ comp exposure discovered at claim time
- Contractor relationships that drift into employment nobody re-examined
- Misclassification lawsuits from workers denied benefits
What’s inside
- Why classification matters — financial and legal exposure explained
- W-2 employee characteristics — control, withholding, benefits
- 1099 contractor characteristics — independence, own tools, invoicing
- The control, financial, and relationship factor framework
- Red flags that signal a contractor is legally an employee
- Steps for auditing your current contractor relationships
Before you process payroll, terminate, classify, deduct, or respond to a claim, get the decision reviewed.
Faulkner HR Solutions helps Texas employers, nonprofits, municipalities, and growing businesses fix the people systems behind recurring workplace problems. If this resource raised a risk flag, do not guess your way through the next step.