Worker classification

Definition

Worker classification is the determination of whether a worker is an employee (W-2) or independent contractor (1099). The decision affects payroll taxes, overtime eligibility, benefits eligibility, workers comp coverage, and unemployment insurance.

Multiple tests apply, each with slightly different criteria: IRS common law test (behavioral, financial, type-of-relationship control); DOL economic realities test (employer control, worker investment, opportunity for profit/loss, special skills, permanence); state ABC tests in some states (California, Massachusetts, New Jersey, others) — under ABC, workers are PRESUMED to be employees unless three specific criteria are met.

Misclassification carries multi-pronged liability: federal tax assessments, state UI fund contributions, workers comp coverage gaps, unpaid wage claims (often back 2-3 years), benefits-related ERISA claims.

Common questions about Worker classification

Related terms

• Independent contractor — A worker who provides services to a business under a contract but is not an employee — typically receiving 1099 income.
• Form 1099 — Annual tax document issued to independent contractors and other non-employees who received payments during the tax year.
• Form W-2 (Wage and Tax Statement) — The annual tax document employers issue to each employee documenting wages paid and taxes withheld.

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