Tax & Compliance
Contractor vs Employee Classification (1099 vs W-2)
Collated by Aparna Devalla, CPA
Curated by Rubric Financial
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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.
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