What determines classification?

Classification depends on economic reality, not labels. The IRS examines: behavioral control (do you direct how work is done?), financial control (investment, multiple clients, profit/loss risk?), and relationship type (permanence, benefits, agreements). No single factor controls. The totality of circumstances determines status.

Why the IRS cares

Employees require payroll tax withholding, employer contributions, and unemployment insurance. Contractors require none. The temptation to classify everyone as contractors is obvious. The IRS audits frequently. Misclassification penalties include back taxes plus interest for years.

Red flags for misclassification

Full-time, on-site, single client, company equipment, set hours, no other business: these describe an employee regardless of contract. Courts look past paperwork to actual conditions. '1099 employee' is a contradiction that reveals confusion.