What is 1099 vs W-2 for contractors?

The 1099 vs W-2 distinction is a major compliance issue in the construction industry. Improper classification can expose contractors, homeowners, and workers to legal and financial risk.

W-2 employee:

• Works under employer's direction.
• Employer withholds income tax, Social Security, Medicare.
• Employer pays Social Security/Medicare matching, unemployment insurance, workers' comp.
• Employer provides tools (in most cases).
• Scheduled hours or work rhythm set by employer.
• Reports income on W-2 form.

1099 independent contractor:

• Runs own business.
• Controls how, when, where work is done (within project constraints).
• Provides own tools.
• Pays own self-employment tax (15.3% on net income).
• Reports income on 1099-NEC form (if paid over $600 in year).
• Buys own insurance.

IRS "Common Law" test (20-factor test, simplified to 3 categories):

1. Behavioral control — does the principal have right to direct how work is done?
2. Financial control — does the worker have significant investment in tools, opportunity for profit/loss, work for multiple clients?
3. Relationship — is there a written contract, permanent vs. project basis, are benefits provided?

California AB 5 / ABC Test (stricter than IRS):

To be 1099 in California, the worker must ALL of:

A. Free from the hirer's control and direction in performing work. B. Performs work that is outside the usual course of the hirer's business. C. Customarily engaged in an independently established trade, occupation, or business.

California's ABC test has been controversial because (B) is hard to meet for most subs — a plumber hired by a GC who does remodels arguably does work "outside the usual course" of the GC's business, but specific industry carve-outs apply.

Why misclassification matters:

• For the worker: loss of minimum wage, overtime, workers' comp, unemployment insurance, tax withholding.
• For the contractor: liability for back taxes, penalties, interest; wage-and-hour lawsuits; workers' comp exposure.
• For the homeowner: if contractor misclassifies, homeowner may be pulled into wage-and-hour litigation or workers' comp claims.

How misclassification typically happens in construction:

• GC classifies "subs" who work only for them, follow their schedule, use their tools — these look more like employees.
• Framing crews paid per day with GC's equipment and supervision — likely employee.
• Painter who brings own brushes, works for 10 different GCs, invoices from own LLC — likely independent.

Homeowner-direct hiring:

If a homeowner hires a worker directly (not through a contractor):

• W-2 path: if worker looks like employee (direction, hours, tools), homeowner should classify as household employee. Household-employee threshold varies by state.
• 1099 path: if worker is genuinely independent (own business, multi-client, own tools), pay via 1099.
• Best practice: hire through a licensed contractor to avoid classification risk.

1099 reporting:

• $600+ in year to non-corporate worker triggers 1099-NEC.
• Form 1099-MISC for certain other payments.
• Homeowners generally not required to file 1099s for personal home improvements (business-related work is different).

Workers' comp implications:

• If the "1099" worker is injured and IRS/state determines they were really an employee, employer (or homeowner if direct-hired) is on the hook for WC.
• Classic fraud pattern: cheap GC classifies workers as 1099 to avoid WC; worker injured; homeowner pulled in.

AskBaily's verification includes confirming that matched contractors properly classify their workers (WC coverage for employees, verified sub licensing for genuine subs).