Is This Worker a 1099 or a W2? Decision Tree

Why this matters

Hand someone a 1099 (the information return you file for a nonemployee) when the law says they earned a W-2 (the wage form for an employee), and a single audit or a single injured worker can trigger years of back payroll taxes, overtime, and penalties. This tree is for the worker standing in front of you right now: walk it to land a defensible call. It gates on which test your state uses first, then applies the federal classification factors in plain order; for the two tests set out side by side, see the related classification reference.

The decision flow at a glance:

  1099 or W-2?
  |
  +-- 0. ABC-test state? ----------> core service you sell
  |                                  fails prong B = employee
  |
  +-- 1. Control when + how? ------> you set hours and
  |                                  sequence = employee
  |
  +-- 2. Only works for you? ------> near-exclusivity
  |                                  reads as employment
  |
  +-- 3. Whose tools + risk? ------> yours, hourly, no
  |                                  loss = employee
  |
  +-- 4. Core work + open-ended? --> favors employee
  |
  +-- 5. Clean across all three? --> own business, own
  |                                  risk = contractor
  |
  +-- 6. Mixed or close? ----------> classify employee
  |                                  or file SS-8

Start here: the default and who carries the burden

The law leans toward employee. You do not have to prove someone is an employee; you have to be able to justify why they are a contractor. So walk this looking for reasons the contractor label fails, strongest reasons first. If a strong one fits, you likely have an employee no matter what the rest say.

Gate 0: check which test your state uses before you walk the factors

The factors below are the federal common-law ones. Several states do not use them for wage, unemployment and workers-comp purposes; they apply a stricter ABC test, under which a worker is an employee unless the hiring business proves all three prongs:

• A - free from your control and direction in performing the work, in fact and under any contract.
• B - the work is outside the hiring business's usual course of business.
• C - customarily engaged in an independently established trade or business of the same kind.

Prong B is the one that decides it for a trade shop, and it decides it early. A worker performing the core service you sell sits inside your usual course of business by definition, so they generally fail prong B regardless of how the control factors below come out. Their own tools, their own hours, other clients and a signed contract do not rescue it. California (Labor Code 2775), Massachusetts and New Jersey are the widest examples; states vary in wording, in carve-outs, and in which programs the test governs.

The applicable test is state law, so confirm yours before applying anything below. Walk the factors anyway once you have: the federal answer still matters for payroll-tax purposes, and the same worker can be an employee under your state's test while the common-law factors are what an IRS examiner weighs. Classify to the strictest test that reaches you. For the two tests side by side, see The Worker Classification Test That Keeps You Out of Trouble.

Strongest signals first: control and exclusivity

Do you control when they work and the order they do things? If you set the hours and sequence the tasks, that is behavioral control, and it points hard at employee. A true sub hits a deadline on their own schedule.

• If yes, you direct the how and when: lean employee. Keep going only to confirm.
• If no, they run their own day to a deadline: continue.

Do they work only for you? Near-total exclusivity, especially over a long stretch, reads as employment. A contractor is a business with other customers, or is genuinely free to have them.

• If they work only for you and always have: lean employee.
• If they serve other clients or clearly could: continue.

Financial signals: whose business is this

Who supplies the tools, truck, and materials? If you do, that weakens the contractor case.

Can they actually lose money on the job? A real sub who underbids eats the loss. A worker paid for time who cannot lose is behaving like an employee.

How are they paid? A price for a defined result points to contractor. An hourly or weekly wage with no scope points to employee.

If the tools are yours, the pay is hourly, and they carry no risk of loss, you are almost certainly looking at an employee.

Relationship signals: permanence and core work

Is the work they do the core service you sell? If yes, that favors employee. Businesses tend to hire employees for their central work and sub out the edges.

Is the arrangement open-ended? An indefinite relationship favors employee; a project with an end favors contractor.

Do you give them anything that looks like a benefit, such as paid time off, a tool allowance, or a spot on the org chart? Those are employee markers.

Land the call

• Multiple employee signals across control, finance, and relationship: treat as a W2 employee. This is the cheaper mistake to make when it is close.
• Clean across all three, meaning own business, own tools, own risk, other clients, defined project: a 1099 contractor is defensible. Document why.
• Genuinely mixed: do not guess. You can ask the IRS to decide by filing Form SS-8, and you should run it past your accountant or an employment attorney. State wage and unemployment agencies may use a stricter test than the IRS, so a worker can be a contractor federally and an employee for state purposes.

Recap

1. Confirm which test your state uses first. In an ABC state, work that is the core service you sell generally fails prong B and the answer is employee before you reach the factors.
2. Start from the default: the law leans employee, and you justify contractor.
3. Check control and exclusivity first, the strongest signals.
4. Check who carries the financial risk.
5. Check permanence and whether the work is your core service.
6. When it is close, classify as employee, or file SS-8 and ask a pro.

References

• IRS, independent contractor vs employee and Form SS-8 (determination of worker status)
• U.S. Department of Labor, worker classification under the Fair Labor Standards Act
• State ABC-test statutes for wage, unemployment and workers-comp classification (California Labor Code 2775 and the widest examples in Massachusetts and New Jersey); wording, carve-outs and covered programs vary by state
• See related: The Worker Classification Test That Keeps You Out of Trouble; The Real Difference Between a Subcontractor and an Employee