Employee Classification Checklist (W-2 vs 1099)

Determine whether the company dictates the methods, processes, and procedures the worker uses to complete their tasks.

Document whether the company provides specific training on how to do the job, which suggests an employer-employee relationship.

Determine if the worker sets their own hours or if the company requires them to work specific days and times.

Assess the level of oversight, whether the worker reports to a manager, and how closely their daily activities are directed.

Evaluate whether the worker chooses the order in which they complete assignments or if the company dictates the workflow.

Determine if the worker receives a regular salary or hourly wage versus being paid per project, invoice, or flat fee.

Document whether the company supplies the computer, software, materials, and workspace or if the worker provides their own.

Determine if the worker can realize a profit or suffer a financial loss based on their business decisions and investments.

Assess whether the worker pays for their own business expenses like travel, supplies, and insurance without company reimbursement.

Determine if the worker has made significant investments in their own tools, office space, or equipment to perform the work.

Examine the written agreement to see if it defines the relationship as employee or independent contractor and what terms govern it.

Determine if the worker receives health insurance, retirement contributions, PTO, or other benefits typically offered to employees.

Evaluate whether the engagement is open-ended and ongoing or limited to a specific project with a defined completion date.

Assess whether the work performed is a core function of the company's business or an ancillary service outside the main operations.

Determine if the worker is free to provide services to other clients simultaneously or works exclusively for the company.

Evaluate the working relationship against the IRS common law factors covering behavioral control, financial control, and relationship type.

Check state-specific independent contractor tests such as the ABC test used in California and other jurisdictions for compliance.

Apply the Department of Labor's economic reality test to determine if the worker is economically dependent on the company.

Write a detailed memo explaining the facts, analysis, and legal reasoning supporting the worker's classification as employee or contractor.

Obtain a completed IRS Form W-9 from every independent contractor before any payments are made for tax reporting purposes.

Prepare and distribute the appropriate tax form by the January 31 deadline based on the worker's classification for the tax year.

Ensure a signed written agreement defining the scope of work, payment terms, and independent contractor status is stored in records.

Verify that independent contractors submit invoices for their work and that payments are tracked separately from employee payroll.

Conduct a yearly review of all independent contractor engagements to confirm classifications remain accurate as relationships evolve.

Seek advice from an employment attorney when the classification analysis is unclear or the worker's situation does not fit neatly into one category.

Review the potential financial penalties, back taxes, benefits liability, and legal consequences of incorrectly classifying a worker.

Create a standard procedure for evaluating worker classification before any new independent contractor engagement begins.

Educate managers on the differences between employees and independent contractors and the legal risks of misclassification.

Stay current on federal and state legislative changes affecting independent contractor rules and adjust practices accordingly.