1099 vs W-2: How to Classify US Workers Correctly
Misclassifying a worker as a contractor can trigger years of back payroll taxes plus penalties. Here's the correct US framework.
6 min read · 12 February 2026
The IRS common-law test
The IRS looks at three factors: behavioural control (who decides how work is done), financial control (who provides tools, bears risk of loss), and the relationship (permanence, benefits, written contracts).
No single factor is decisive. A written agreement calling someone a contractor does not override the reality of the relationship.
State ABC tests are stricter
California, Massachusetts, New Jersey and several other states apply an ABC test: the worker is presumed to be an employee unless the hirer proves (A) freedom from control, (B) work outside the usual course of business, and (C) an independently established trade.
Part (B) is fatal for most gig-economy classifications and for agencies that treat their core deliverers as contractors.
The cost of getting it wrong
Misclassification exposure includes unpaid payroll taxes (both employer and employee share), unemployment insurance, workers' compensation, wage-and-hour claims, and IRS penalties starting at 1.5% of wages and rising sharply if the IRS finds intent.
Voluntary Classification Settlement Program (VCSP) can cap exposure if you self-report before an audit.