What is the difference between a 1099 contractor and a W-2 employee?

The distinction turns on the degree of control the business exercises, and calling someone a contractor in a signed agreement does not settle it. The IRS examines behavioral control, whether you direct how and when the work is done and provide training, financial control, whether the worker has unreimbursed expenses, a real opportunity for profit or loss, and offers services to the broader market, and the relationship itself, including written contracts, benefits, permanence, and whether the work is a core function of the business. No single factor decides it; the whole picture does.

The stakes are asymmetric and fall on the business. A misclassified worker means unpaid employment taxes, the employee's share the business failed to withhold, interest, and penalties, and potentially liability for unpaid overtime, benefits, and workers' compensation coverage. Several states apply a stricter test than the federal one, most notably the ABC test used in California and elsewhere, under which a worker is presumed an employee unless the business proves the worker is free from control, performs work outside the usual course of the business, and is independently established in that trade. That middle prong is the hard one, because it means a bakery generally cannot classify its bakers as contractors no matter how the arrangement is structured.

Practical guidance. Contractors set their own hours and methods, use their own equipment, work for multiple clients, invoice for deliverables rather than time clocked, and are engaged for defined projects. If you find yourself needing someone available during set hours doing core work under your direction, that is an employee, and payroll services make the compliance manageable at modest cost. Collect a W-9 before paying any contractor, issue a 1099-NEC for payments above the annual threshold, and if the classification is genuinely ambiguous, IRS Form SS-8 requests an official determination.