Contractor or employee? Three questions before you send a 1099

Calling someone a contractor doesn't make them one. The IRS looks at how the work actually happens. Before you send a 1099 instead of running payroll, ask three questions.

1. Who controls how the work is done?

If you set the hours, train the person, and tell them how to do each task, that points to employment. A contractor is hired for a result and decides how to get there. Instructions about the result are fine; instructions about every step are not.

2. Who controls the money side?

Contractors usually invest in their own tools, can make or lose money on a job, offer their services to others, and send invoices. Employees are paid for their time and have their expenses covered. The more the person looks like a business of their own, the stronger the contractor case.

3. What is the relationship?

A written contract helps, but it isn't decisive. Benefits such as paid leave, an open-ended arrangement, and work that is central to what your business does all point toward employment.

No single answer decides it. The IRS weighs the whole picture.

The common grey areas

A designer who works only for you, on your schedule, using your software, looks more like an employee than the invoice suggests. A cleaner who serves many businesses, brings their own equipment and sets their own hours looks like a contractor. A former employee who comes back as a contractor to do the same job, the same way, is the case that most often goes wrong.

Paperwork that helps

Keep a signed agreement that describes the result you're paying for, a W-9 collected before the first payment, and the contractor's invoices. None of it decides the question on its own, but together it shows how the relationship really worked.

What getting it wrong costs

If a contractor turns out to be an employee, the business can owe the payroll taxes that should have been withheld and paid, plus penalties and interest. States may add their own, and some use stricter tests than the IRS. The IRS does have a voluntary settlement programme for businesses that want to correct classification going forward.

When to ask us

Before the first payment, ideally. A ten-minute conversation is cheaper than a correction. If a case is genuinely unclear, the IRS can make a formal determination, though it takes months. Most of the time, the three questions above give a clear enough answer.