Worker Classification: 1099 vs W-2

The IRS common-law test

Three factor groups (replaced the old 20-factor test for analytical clarity, though the underlying facts remain the same): **Behavioral control** — Does the business control how the work is done? Instructions about when, where, what tools, what sequence, what training. Strong behavioral control → employee. **Financial control** — Does the worker have a meaningful business of their own? Investment in equipment, unreimbursed expenses, opportunity for profit/loss, services available to the market, payment by job vs by hour. Strong financial independence → contractor. **Type of relationship** — Written contract terms, employee-type benefits (health, retirement, vacation), permanency, integration into core business. Permanent, benefited, and integrated → employee. No single factor controls. The IRS looks at the totality.

The ABC test (CA, NJ, MA, others)

Under California Labor Code §2775 (codifying Dynamex / AB-5), a worker is presumed an employee unless the hiring entity proves ALL THREE prongs: A. The worker is free from control and direction in performing the work; B. The work is OUTSIDE the usual course of the hirer's business; and C. The worker is customarily engaged in an independently established trade. Prong B is the killer for most platforms — a delivery app cannot classify drivers as contractors because driving IS its usual business. AB-5 carved out 100+ professions (lawyers, dentists, photographers, freelance writers under certain limits), but the default is employee-classification. New Jersey, Massachusetts, Connecticut apply substantially similar three-prong tests.

§530 relief — the safe harbour

Under the Revenue Act of 1978 §530, a business escapes federal employment-tax reclassification if all three apply: 1. **Reasonable basis** for treating the worker as a contractor (industry practice, prior IRS audit clean, judicial precedent, or written guidance); 2. **Consistent treatment** — all similarly situated workers treated the same way; 3. **1099 filing compliance** — Form 1099-NEC filed for every contractor each year. §530 only protects federal employment tax. It does NOT protect against state-law reclassification, ABC-test failure, FLSA wage-and-hour claims, or workers' compensation exposure.

Form SS-8 — determination of status

Either the worker or the hiring entity may file Form SS-8 asking the IRS to determine status. The IRS's determination binds the WORKER's tax position (they can use it to file Form 8919 and pay only the employee FICA share) but is only persuasive on the HIRING ENTITY. Most businesses do not initiate SS-8 — it is the worker's typical lever in a dispute.

Practical fact patterns that lose

Patterns that consistently produce reclassification: • Workers who only work for one company, for years, with no other clients • Set schedule, required meetings, supervisor performance reviews • Business-supplied tools, training, branded uniforms or vehicles • Hourly or salaried payment without project deliverables • 'Independent contractor' written contracts that contradict day-to-day reality • Workers performing the company's core business (driving for a delivery company, cooking for a restaurant) The written contract is the weakest evidence. The IRS, Department of Labor, and state agencies all look at substance.

Worked example: Coastal Construction LLC vs Javier (drywall installer)

Javier installs drywall on Coastal's projects, 35–45 hours/week, supplied with company truck, branded shirt, and a daily schedule. Paid hourly. Has no other clients. Coastal issues a 1099-NEC.

Behavioral: company-set schedule, company truck, branded uniform → employer control Financial: hourly pay, no unreimbursed investment, no other clients, no profit/loss risk → not independent Relationship: ongoing, full-time, core to Coastal's business → integrated employee Federal common-law: clear employee. If in California: ABC prong B fails — drywall IS Coastal's business. Reclassification exposure: Back FICA (employer + employee): ~15.3% × wages FUTA: 0.6% × first $7,000 State UI / workers' comp Misclassification penalties under IRC §3509 or full rates if intentional §530 likely unavailable — no reasonable basis for treating a full-time uniformed driver as a contractor.

Statute references

• Reduced-rate misclassification penalties — IRC §3509
• §530 safe harbour — Revenue Act of 1978 §530; Rev. Proc. 85-18
• California ABC test — Cal. Labor Code §2775 (Dynamex / AB-5)
• Worker status determination request — Form SS-8
• Worker FICA share when reclassified — Form 8919; IRC §3102

Related pages

• Schedule C Guide →
• Self-Employment Tax Guide →
• Reasonable Compensation Guide →