W2 or 1099? Simple Employee Classification Tests for Employers

Getting worker classification right is crucial. Misclassifying W-2 employees and 1099 independent contractor carries significant legal and financial implications.

Misclassification can lead to hefty penalties, back taxes, and a host of other issues. 

Understanding the Importance of Proper Classification

First, it's essential to understand why this matters. Employers must withhold income taxes, Social Security, and Medicare taxes from employee wages. They're also on the hook for unemployment tax. None of this applies to payments to independent contractors.

According to the IRS, those who provide services to other businesses are generally considered self-employed. However, it's not always that simple.

Key Tests for Determining Worker Status

New York State relies on several tests to determine whether a worker is an employee or an independent contractor. Here's a breakdown:

The Common Law Test: Direction and Control

New York courts primarily use the "direction and control test." This test zooms in on whether the employer controls the results of the work or, more importantly, the means by which those results are achieved. 

• What it means: If you're dictating how the work is done, step-by-step, that points to an employer-employee relationship. If the worker has autonomy in choosing their methods, it suggests an independent contractor arrangement.

The Common Law Test for Professionals

There's a specialized version of the common law test for professionals like physicians, accountants, teachers, tutors, and photographers. Even if you don't control the results or the means, if you control other key aspects of their services, they may still be classified as employees. 

The "ABC" Test for Commercial Goods Transportation

If your business is in the commercial goods transportation industry, the Commercial Goods Transportation Industry Fair Play Act is key. This act covers drivers who transport goods for compensation in New York State using commercial motor vehicles. Under this act, these drivers are presumed to be employees unless they pass either the ABC test or the separate business entity test.

The ABC Test

This test has three parts: