Free tool
1099 or W-2?
This is the most expensive mistake a growing service business makes, and it is usually made in good faith. Fourteen questions against the factors the IRS actually weighs, plus the state test that overrides all of them in a few places.
A risk indicator, not a determination
Nothing here decides your case. Classification turns on the full picture, three separate tests can reach different answers about the same person, and only the IRS or a court settles it. Use this to work out how worried to be, then talk to an accountant or an employment attorney.
Three tests, and they can disagree
The thing that catches people out is assuming there is one answer. The same person can be a contractor for one purpose and an employee for another, and you have to satisfy all of them.
| Test | Who applies it | What it decides |
|---|---|---|
| Common law | IRS | Federal payroll tax. Behavioral control, financial control, type of relationship. This is what the questions above weigh. |
| Economic reality | Department of Labor | Minimum wage and overtime under the FLSA. Currently being rewritten, see below. |
| ABC | Many states | State wage law, unemployment insurance and workers comp. Usually the strictest of the three. |
The federal wage and hour test is being rewritten right now
The 2024 six-factor rule still governs private lawsuits, but the Department of Labor has stopped enforcing it and told its own investigators to apply an older 2008 framework instead. In February 2026 it proposed replacing the rule with a narrower two-factor test built around control and opportunity for profit or loss. The comment period closed in April 2026 and a final rule is expected later in the year.
For a small employer the practical takeaway is unchanged. The IRS test and your state test both still apply whatever the DOL settles on, and the state test is usually the stricter of the two.
Prong B, and why it matters so much here
In an ABC state a worker counts as an employee unless the business proves all three of these. Not most of them. All three.
| The prong | Realistic for a service business? | |
|---|---|---|
| A | Free from your control and direction in fact and under contract | Possible, if you genuinely do not direct the work |
| B | The work is outside the usual course of your business | Usually impossible. See below |
| C | Customarily engaged in an independent trade of the same nature | Possible, for an established business with other clients |
Prong B is the one that ends most of these conversations. If you run a cleaning company and the person cleans, the work is not outside the usual course of your business. It is the usual course of your business. No contract, no independence and no amount of them owning their own equipment gets you past it.
The genuine contractor for a cleaning company is the accountant, or the person who fixes the van. Not the cleaner.
What it costs to get wrong
- Back payroll taxes for the whole period, both the employee share you never withheld and your own.
- Penalties and interest stacked on top of that.
- Unpaid overtime, because a misclassified worker was never exempt from it.
- State penalties, which in ABC states are often the largest single line.
- Personal liability. Unremitted withholding is a trust fund liability, and that can reach through a company to the owner. This is the part that turns a tax problem into a personal one.
If you think you already have this wrong
Do not quietly switch them to a W-2 next month and hope nobody looks back. That leaves the earlier period exposed and can look worse than doing nothing.
- Talk to an employment attorney first, before you change anything or write anything down.
- Ask about the Voluntary Classification Settlement Program. Coming forward is dramatically cheaper than being found.
- Consider Form SS-8 if you want the IRS to rule, understanding it takes months and the answer is binding.
The honest summary
If someone works set hours, uses your equipment, does the work your business sells, and works mostly for you, they are an employee. That describes almost every first hire in this industry. Our cost calculator shows what that actually costs, and it is usually less than owners fear and far less than getting this wrong.
Common questions
Can I just pay my cleaner as a 1099 contractor?
Usually not, and in California, Massachusetts and New Jersey almost certainly not. Those states ask whether the work sits outside the usual course of your business. A cleaner working for a cleaning company fails that on its face, regardless of what the contract says or whose vacuum it is.
They asked to be a 1099. Does that protect me?
No. Classification is not something the two of you can agree on. The IRS and your state look at the actual working relationship, and a signed agreement calling someone a contractor carries very little weight against facts that say otherwise. The liability lands on you, not on them.
What does getting it wrong actually cost?
Back employment taxes for the whole period, plus penalties and interest, plus unpaid overtime and potentially state penalties on top. Worse, unremitted withholding is a trust fund liability, which can reach through a company and land on the owner personally.
How do I get a definitive answer?
File Form SS-8 and the IRS will make a determination, though it takes months and you may not like the answer. If you already have workers you think are misclassified, ask an employment attorney about the Voluntary Classification Settlement Program before an agency finds you, since coming forward costs far less than being caught.
Federal and state positions checked 28 August 2026. The federal wage and hour rule is actively changing, so confirm before relying on it.