Worker Classification Wizard
Misclassifying a worker as a contractor instead of an employee is one of the most expensive mistakes a founder can make. Use this 5-question assessment to evaluate your risk.
Why Classification Matters
The IRS, DOL, and state agencies actively audit worker classification. Penalties include back taxes (employer and employee portions), interest, overtime pay, benefits, workers' comp premiums, and potential treble damages. California alone collected over $450M in penalties in 2023.
Does the company control HOW the worker performs their tasks?
Consider: Does the company provide detailed instructions, training, or specify the methods/tools to use?
Understanding the Test
This assessment is based on the IRS 20-factor test and the DOL Economic Reality test. The more control you exercise over HOW work is done, the more likely the worker is an employee. The more the worker operates as an independent business, the more likely they are a contractor.
Frequently Asked Questions
What is the difference between a W-2 employee and a 1099 contractor?
W-2 employees work under the direction of the employer, receive benefits, have taxes withheld, and are protected by employment laws. 1099 contractors operate as independent businesses, control their own work methods, and are responsible for their own taxes and insurance.
What happens if I misclassify a worker?
Misclassification can result in back taxes, penalties, and interest from the IRS. You may owe unpaid overtime, benefits, and workers' compensation premiums. States may assess additional penalties. Workers can sue for misclassification and recover back pay plus damages.
What is the ABC test for worker classification?
The ABC test presumes workers are employees unless: (A) the worker is free from control, (B) the work is outside the usual course of business, and (C) the worker has an independent business or trade. States like California, Massachusetts, and New Jersey use this strict test.
What documents do I need for an independent contractor?
At minimum, you need a Form W-9 and a written independent contractor agreement. The agreement should specify the scope of work, payment terms, and establish the worker's independence. Consider requiring proof of insurance.
Can I convert a contractor to an employee?
Yes, you can reclassify a contractor as an employee. You'll need to complete all new hire paperwork (W-4, I-9, state forms), enroll them in benefits if applicable, and begin withholding taxes. Consider consulting with an attorney about potential liability for the period they were misclassified.
Understanding Worker Classification
The distinction between employees (W-2) and independent contractors (1099) has significant implications for taxes, benefits, and legal compliance. The IRS uses a 20-factor test that examines behavioral control, financial control, and the type of relationship. The Department of Labor uses an "economic reality" test focusing on whether the worker is economically dependent on the employer.
Many states, including California, Massachusetts, New Jersey, and Illinois, have adopted the stricter "ABC test" which presumes all workers are employees unless all three criteria are met: the worker is free from control, performs work outside the usual course of business, and customarily engages in an independently established trade.
This wizard helps you assess your situation based on these federal and state criteria. For high-risk classifications, we strongly recommend consulting with an employment attorney before engaging the worker.