A small business hires someone to help with projects. No payroll. No paperwork. Just writes a check and calls it a 1099. Easy, right? Until the IRS shows up. And suddenly “easy” turns into “you owe thousands in back taxes, penalties, and interest.”
Why? Because the IRS did not agree with what you called that person.
W-2 vs 1099: One Tiny Label, One Giant Mistake
If someone works only for you, follows your schedule, and uses your tools, the IRS probably sees them as an employee. But if they use their own stuff, decide how and when they work, and take on other clients, that’s more like a contractor.
Most business owners don’t know where the line is. They just hope for the best. And the IRS is really good at sniffing out hopeful guesses.
Why the IRS Freaks Out Over This
Because calling someone a contractor when they’re actually an employee skips a whole bunch of tax stuff the IRS wants you to pay:
- Social Security and Medicare
- Federal and state unemployment taxes
- Income tax withholding
- Quarterly payroll returns
You skip that? They smell blood. They’ll come after you for all of it. Plus interest. Plus penalties. Plus whatever else they can tack on.
“But They Asked to Be 1099!”
Doesn’t matter.
They could beg you to cut them a check each week and say they hate payroll. The IRS doesn’t care. If they walk like an employee, talk like an employee, and work like an employee? That’s exactly what the IRS calls them.
You don’t get to decide. They do.
Red Flags You’re Doing It Wrong
Here’s where things start looking sketchy:
- You tell them what hours to work
- You supply the tools, equipment, or work location
- They work only for you, not other clients
- They don’t invoice you: they just expect regular payments
If you’re nodding along to that list, they’re probably an employee. And if they are? You’re responsible for everything you didn’t file or pay.
The IRS Bill That Could Break You
Misclassify a worker and the IRS will send you a bill for everything you skipped: back payroll taxes, both Medicare and Social Security, and unemployment insurance.
After that, they will pile on interest. Then come the penalties. And if they think you knew better? That’s when they drop the willful misclassification penalty, which hits harder than all the rest combined.
It gets even uglier once lawyers get involved. A worker might claim they were owed benefits, back pay, overtime, or more… and their attorney will come looking for it all.
We’ve seen it spiral fast. Most small businesses are not built to survive that kind of hit.
Do This Now or Get Torched Later
You can still work with contractors. Just do it right. Use a signed contractor agreement and make sure they invoice you for each job. Let them decide how and when they work, and don’t treat them like a full-time employee.
If it starts to feel like they are part of your team, it’s time to rethink the arrangement or put them on payroll before the IRS does it for you.
Need a second set of eyes before it becomes a disaster? Let’s look at it together
