Written by Matthew Kaplan, Solex

Misclassifying workers is so common with employers today. Often business owners think it’s just an option they get to choose. Unfortunately, this is very wrong. Misclassifying workers as independent contractors instead of employees not only incorrectly taxes their payments for worked performed but can also exclude them from benefits they should be entitled to. When caught, this mistake can become very costly to the business. When properly determining whether a worker should be classified as a W2 employee or a 1099 independent contractor, employers must follow federal guidelines and be aware of state-specific laws, which may impose stricter testing criteria.

At the federal level, the IRS uses a three-factor test based on:

• Behavioral Control – Does the company control how the work is done?
• Financial Control – Does the company control financial aspects like reimbursement and tools?
• Type of Relationship – Is the work ongoing and essential to the business?

The Department of Labor uses similar economic realty tests, focusing on:

Whether the worker is economically dependent on the employer?

If the employer exercises significant control

Some states apply their own state specific rules. California, Massachusetts and New Jersey use the ABC test as follows:

A: Is the worker free from control and direction?

B: Does the worker perform work outside the usual course of the company’s business?

C: Is the worker customarily engaged in an independent trade or business whose services are provided to other companies?

Failure to meet these conditions typically requires classification as a W2 employee