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Employee vs. Independent Contractor: Classification Rules Every SMB Should Know
Compliance, Classification, 1099 vs W-2 Alex Santos Compliance, Classification, 1099 vs W-2 Alex Santos

Employee vs. Independent Contractor: Classification Rules Every SMB Should Know

The difference between an employee (W-2) and an independent contractor (1099) is determined by the substance of the working relationship, not the label on the paperwork. Federal agencies (IRS, DOL) and state agencies each apply their own multi-factor tests, and a worker can legally be a contractor under one and an employee under another. The most consequential question across nearly every test is whether the worker is economically dependent on your business or genuinely running their own. Getting the classification wrong is the single most expensive HR mistake an SMB can make — penalties stack across federal taxes, state taxes, unpaid overtime with liquidated damages, workers' comp, unemployment insurance, and benefits.

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