The distinction between a W-2 employee and an independent contractor (1099) is associated with how much control and independence exists in the working relationship, as defined by the IRS's common-law test.
The IRS COMMON LAW TEST considers the following three categories in their determination:
1. Behavioral control is associated with the extent to which the company dictates policy on how the work is done, including instructions and extensive and intense training are typical actions directed at w-2 employees rather than at 1099 independent contractors.
2. Financial control focuses on the flow of money such as who invests in equipment, who pays or covers the expenses, more importantly, can the worker in question realize a profit or loss; a worker who is financially independent and takes on business risks is typically a contractor.
3. Relationship of the Parties may include written contracts, provision of employee benefits (which contractors do not receive), and the permanency of the relationship.
In summary, the core difference lies in control and financial independence. A W-2 employee is subject to the company's direct supervision over their work methods, schedule, and tools, and they receive employee benefits and regular wages. Conversely, an independent contractor is free to choose their own work methods, is typically paid a flat fee per project via invoice, furnishes their own equipment, and assumes the inherent business risk of profit or loss.
WARNING !!!
Because misclassifying a worker can lead to severe penalties, it's essential to analyze the totality of the relationship factors rather than depending on a single criterion.
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Independent contractor (self-employed) or employee?
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