1099 or Employee? You Don’t Get to Choose

Here's the conversation I have with clients constantly:

"Oh, we decided this person would be a 1099." Or, "They came in and told us they wanted to be a 1099."

I have to stop them there. As business owners, we don't get to make that decision. Neither does the worker. It's determined by federal law based on the nature of the work itself.

Plenty of contractors prefer 1099 status because of what they can write off. That's a fine preference. It has no bearing on the classification. And a signed letter saying "we both agree this person is a contractor" will not protect you.

When I do HR assessments, letting the worker choose is one of the most common mistakes I find.

What the Government Is Really Asking

Underneath every version of this test — and the rules have changed more than once in recent years — the question is the same: is this person genuinely running their own business, or are they economically dependent on yours?

The factors regulators look at include:

Opportunity for profit or loss. Does the worker set their own price, accept or decline jobs, do their own marketing, hire their own subs? Could they actually lose money on a job? An employee gets paid for work performed. A real contractor carries business risk.

Investment in tools and equipment. Employees get a computer, a desk, supplies, training. Contractors buy their own. But be careful — you can't simply tell your remote employees to buy their own laptops and call them contractors. It's one factor among several.

Permanence of the relationship. Is this ongoing and regular, or project-based work for someone who serves many clients? And here's a big one: part-time does not mean contractor. Most part-time people are employees. A part-time bookkeeper whose hours you set is absolutely an employee.

Degree of control. Do you set their schedule, supervise the work, reserve the right to discipline them? That's employment.

Is the work integral to your business? Someone doing your payroll is doing something central to your operation — that's an employee. Someone doing your taxes once a year, or serving as a fractional CFO, can genuinely be a contractor. Same field, different answer.

Specialized skill and initiative. Is the worker bringing highly specialized expertise and running their piece of the project — scoping it, pricing it, deciding how many hours it takes — or are they dependent on your training to do the job?

Read those together and a pattern emerges. The people who genuinely qualify as contractors are, in effect, running an entire business around the work — marketing, pricing, risk, and all.

Why This Is Worth Your Attention Right Now

The rules here have been a moving target. A six-factor test took effect in March 2024. In early 2026, the DOL proposed replacing it with a five-factor test that gives greater weight to two core factors: the degree of control, and the worker's opportunity for profit or loss.

You don't need to track every regulatory turn. You need to know that the underlying question hasn't changed — and that anyone you've classified as a contractor should be able to survive it.

The Penalties Are Not Small

This is the part I want you to sit with. If you misclassify someone — even unintentionally — you can face wage law violations, unpaid employment taxes, I-9 violations, unemployment insurance shortfalls, unpaid workers' comp premiums, improper exclusion from benefits, anti-discrimination violations, and failure to provide job-protected leave.

We went through a Department of Labor audit ourselves. A contractor of ours was laid off from another job and filed for unemployment; that agency came to us as a second employer of record and challenged her status. We had to prove everything — she priced her own jobs, accepted or declined work, had other clients, had her own business card and business name, and we exercised no control. After multiple calls, they ruled in our favor.

I was relieved. But I'll be honest: if we hadn't done all of those things right from the beginning, we would not have been given grace.

If You Need to Convert Someone, Plan for the Cost

Say you review your contractors and find someone who should be an employee. Two things to think through.

The conversation. Regulatory change is actually a clean way to frame it: "The government changed the test. We reviewed everyone. Here's what we found and what we need to do." It isn't about anyone having done something wrong.

The math. As a contractor, they pay roughly 15% in self-employment tax — both halves. As an employee, you pick up about 7.5%, plus workers' comp, errors and omissions coverage, benefits if applicable, and vacation. That burden runs 15-18%.

So if they were making $30 an hour as a contractor, keeping them at $30 as an employee leaves them meaningfully better off and you meaningfully worse off. Many companies reduce the rate by roughly 7.5% at conversion — which usually leaves the worker whole, since their self-employment tax drops by the same amount.

With one person, this is manageable. With a group of 30, you need a plan.

What to Do This Month

Pull the list of everyone you pay on a 1099. For each one, ask honestly whether they'd survive the test. If you're not sure, get help — because if the Department of Labor shows up, you'll be answering these questions anyway. Far better to know the answers in advance.

Want us to review your contractor classifications? It's work we do regularly. Grab a free 30-minute session with one of our HR experts, and let's take a look together.