Tax & Compliance
Contractor vs Employee Classification (1099 vs W-2)
Collated by Aparna Devalla, CPA
Curated by Rubric Financial
1 / 5
IRS Classification Criteria
- The IRS uses a three-factor test — behavioral control, financial control, and relationship type — to determine whether a worker is an employee or independent contractor.
- Behavioral control asks whether the company directs how, when, and where the work is performed; employees typically follow set schedules and use company-prescribed methods.
- Financial control examines whether the worker has unreimbursed expenses, investment in equipment, opportunity for profit or loss, and availability to work for other clients.
- Relationship type considers written contracts, benefits (health insurance, PTO, retirement), permanency of the relationship, and whether the work is a key activity of the business.
Related Resources
Tax & Compliance
R&D Tax Credits for Startups
Discover how your startup can claim R&D tax credits to offset payroll taxes or reduce income tax liability by up to $500K per year.
Tax & ComplianceBusiness Entity Selection: C-Corp vs LLC vs S-Corp
How to choose the right entity structure for your startup based on funding plans, tax implications, and operational needs.
Tax & ComplianceSection 754 Election: Step-Up Basis for Partnerships (and Why S-Corps Can't)
The §754 election is the mechanism that lets partnerships and LLCs step up the inside basis of their assets when a partner dies, transfers their interest, or takes a distribution. S-corps have no equivalent — a real cost founders often discover too late.
