IRS Common Law Test (Federal)
1099 — INDEPENDENT CONTRACTOR
W-2 — EMPLOYEE
Instructions on how to do the work
You decide HOW the work gets done. Client describes the result, not the method.
Employer tells you how, when, where, and in what order to do the work.
Training
You bring your own skills and methods; no training is provided by the hiring party.
Employer provides training on procedures, methods, or tools used in the role.
Set work schedule / hours
You set your own hours and work whenever you choose (within deadlines).
Employer sets your work hours, shifts, or required availability.
Work location
You choose where to perform the work (home office, your shop, anywhere).
Required to work at the employer's premises or a location they designate.
Order or sequence of tasks
You decide the order in which to complete the work.
Employer specifies the order or routine in which tasks must be completed.
Evaluation systems
Evaluated only on the end result / deliverable.
Evaluated on how you perform the day-to-day work, with performance reviews.
Right to hire helpers or subcontract
You can hire, pay, and supervise your own assistants or subcontractors.
You must personally do the work; cannot delegate without employer approval.
IRS Common Law Test (Federal)
1099 — INDEPENDENT CONTRACTOR
W-2 — EMPLOYEE
Significant investment in equipment / facilities
You have made a real investment in tools, equipment, software, or a workspace.
Employer provides the equipment, tools, software, and workspace you use.
Unreimbursed business expenses
You pay your own business expenses (supplies, travel, insurance) without reimbursement.
Employer reimburses business expenses or provides what you need to do the job.
Opportunity for profit OR loss
You can earn a profit OR suffer a financial loss based on how you manage the work.
You receive set wages or salary; you cannot lose money by doing the job.
Services available to the market
You actively market your services to multiple clients (website, ads, business cards).
You work exclusively for one employer and don't offer services to the public.
Method of payment
Paid by the project, milestone, or flat fee. You invoice the client.
Paid an hourly wage, salary, or commission on a regular pay schedule (W-2).
Multiple clients / customers
You have (or are free to have) multiple concurrent clients.
You typically work for only one company and cannot freely take outside work.
Tools and supplies
You supply your own tools, materials, and supplies.
Employer supplies the tools, materials, and supplies needed for the job.
IRS Common Law Test (Federal)
1099 — INDEPENDENT CONTRACTOR
W-2 — EMPLOYEE
Written contract
Written agreement describes you as an independent contractor (not decisive on its own).
Offer letter, employee handbook, or W-4 establishes an employment relationship.
Employee-type benefits
You do NOT receive benefits (no health insurance, PTO, retirement plan, sick leave).
Receives benefits such as health insurance, paid time off, 401(k), or sick leave.
Permanency of relationship
Engagement is for a specific project, gig, or fixed term with a defined end.
Relationship is indefinite or continuing with no defined end date.
Services are key to the business
Your work is supplemental or a one-off; not part of the company's core operations.
Your work is integral to the regular business of the company (e.g., a driver for a delivery company).
Right to terminate
Either party can terminate per the contract; usually requires breach or notice.
Employer can fire you at will (in most states) without cause.
Exclusivity
Free to work for competitors and other clients at the same time.
Often required to work exclusively for the employer.
Common in CA, MA, NJ, IL, CT, VA, WA, and others — all three prongs must be met to be a contractor
1099 — INDEPENDENT CONTRACTOR
W-2 — EMPLOYEE
Prong A — Freedom from control & direction
You are free from the hiring entity's control and direction, both under contract AND in actual practice.
The hiring entity controls or directs how you perform the work.
Prong B — Outside the usual course of business
The work you perform is OUTSIDE the usual course of the hiring entity's business.
The work is WITHIN the hiring entity's usual course of business (this prong fails most gig classifications).
Prong C — Independently established trade
You are customarily engaged in an independently established trade, occupation, or business of the same nature.
You do not have your own established independent business doing this type of work.
How classification affects taxes, benefits, and protections
1099 — INDEPENDENT CONTRACTOR
W-2 — EMPLOYEE
Tax withholding
No taxes withheld from pay. You pay your own income tax and the full 15.3% self-employment tax (quarterly estimated payments).
Employer withholds federal/state income tax, Social Security, and Medicare. Employer pays half of FICA.
Tax form issued
Receive Form 1099-NEC (or 1099-K from a platform) if paid $600+ in a year.
Receive Form W-2 reporting wages and withholdings.
Workers' compensation coverage
Not covered by employer's workers' comp; you carry your own if you want it.
Covered by employer's workers' compensation insurance.
Unemployment insurance
Not eligible for state unemployment insurance benefits (generally).
Employer pays into unemployment; you're eligible to file for benefits if laid off.
Wage & hour protections
Not entitled to minimum wage or overtime under the FLSA.
Entitled to minimum wage, overtime, and other FLSA protections (if non-exempt).
Anti-discrimination & labor law coverage
Generally NOT covered by Title VII, ADA, FMLA, and most labor laws.
Protected by federal/state anti-discrimination, leave, and labor laws.
Business filings & licenses
You may operate as a sole prop, LLC, or S-corp; carry a business license, EIN, liability insurance.
No business license or EIN needed for the employment relationship.
Sources: IRS Publication 15-A; IRS Common Law Rules (Behavioral, Financial, Relationship); IRS Form SS-8; California AB-5 / Dynamex ABC Test; FLSA Economic Realities Test (US DOL).