1099 or W-2? Getting Contractor Classification Right From the Start
At some point, your business might grow enough that you need help — someone to answer emails, manage social media, handle overflow bookings. And the moment you bring someone on, you’ll run into a question that has real consequences if you get it wrong: are they an employee or a contractor?
This isn’t a preference question. The IRS and the Department of Labor have actual criteria for this, and misclassifying someone can mean back taxes, penalties, and a much worse conversation than the one you’re avoiding by not thinking about it now.
The basic difference.
An employee (W-2) works under your direction — you control how, when, and where the work gets done, you may provide equipment or training, and you withhold taxes from their pay. A contractor (1099) generally runs their own independent business, controls how they do the work, uses their own tools, and is responsible for their own taxes.
Why “I’ll just call them a contractor” is risky.
It’s tempting, because contractors are simpler on paper — no withholding, no payroll taxes, no benefits obligations. But if the actual working relationship looks like employment — set hours, ongoing direction, work that’s central to your business rather than an outside service — calling it a contractor relationship doesn’t make it one. The classification depends on the reality of the arrangement, not the label on it.
What this means practically.
Before you bring someone on, think honestly about the relationship you’re actually creating. Are you dictating specific hours and methods, or are you hiring someone to produce a result on their own terms? Is this a core, ongoing part of your operation, or a defined project? These questions matter more than what either of you would prefer to call it.
Where the $600 threshold comes in.
If you pay a contractor $600 or more in a year, you’ll need to issue them a 1099 at tax time — which means collecting a W-9 from them before you pay them the first dollar, not scrambling for their information in January.
This is a decision worth getting right the first time.
Misclassification issues are far more painful to fix after the fact than to get correct at the start. If you’re not sure which category someone falls into, that’s a conversation worth having with your CPA before you bring them on, not after.
Once you do have contractors or employees, keeping their payments correctly categorized and their tax documents organized is part of what clean bookkeeping handles for you — so tax season isn’t a scramble to remember who you paid what. That’s part of what I set up for clients at Kimberly Hill Business Studio.
— Kimberly
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