Guide

1099 vs W-2: hiring a helper for your trade business

· Last updated Nov 2026 · Figures are estimates, not tax or insurance advice.

It is tempting, when you first need a helper, to pay the person as a contractor, issue a 1099, and skip payroll taxes and workers' compensation. That only works if the person is actually an independent contractor. The form you use, and even a signed “contractor” agreement, do not control the outcome. The IRS and the U.S. Department of Labor look at the facts of the relationship, and they do not use identical tests.

The IRS common-law test (employment taxes)

IRS Topic 762 says that for federal employment-tax purposes, the usual common-law rules apply. You examine the relationship and the degree of control and independence. The facts fall into three groups:

• Behavioral control: whether the business has the right to direct what work is done and how it is done, including instructions and training.
• Financial control: unreimbursed expenses, investment in tools and facilities, whether the worker can market services to others, how the worker is paid, and whether the worker can realize a profit or loss.
• Relationship of the parties: written contracts, employee-type benefits such as insurance or vacation pay, how permanent the relationship is, and whether the work is a key part of the company's regular business.

Publication 15-A is the longer employer's guide to the same topic. If you want the IRS to decide a specific case, you can file Form SS-8. There is also a Voluntary Classification Settlement Program for certain employers who want to reclassify workers as employees with partial relief from federal employment taxes.

The DOL economic reality test (minimum wage and overtime)

The Fair Labor Standards Act uses a broader “suffer or permit to work” definition of employ. The Department of Labor's current small-entity compliance guide (final rule effective March 11, 2024; a new proposed rule was announced February 26, 2026, with comments due April 28, 2026) describes an economic reality test with six factors: opportunity for profit or loss depending on managerial skill; investments by the worker and the potential employer; permanence of the relationship; nature and degree of control; whether the work is integral to the business; and skill and initiative. No single factor controls.

The same guide states, clearly, that a worker cannot waive FLSA rights by signing an independent contractor agreement, and that a person can be an employee for FLSA purposes even if they are an independent contractor for tax purposes. If a helper is an employee under the FLSA, you generally owe at least the federal minimum wage and overtime at one and one-half times the regular rate for hours over 40 in a workweek, unless an exemption applies.

What this often looks like in a trade shop

A helper who shows up on your schedule, uses your van and tools, wears your shirts, does only your jobs, and is paid by the hour is showing many employee factors under both tests — especially if the work is the same plumbing, electrical, HVAC, or cleaning work that is your business. A specialist who advertises to many contractors, brings a crew and equipment, sets a bid price, and can accept or decline jobs is closer to a contractor. The DOL guide uses a landscaping example and a welding example to draw that contrast. Indiana also has information-sharing rules aimed at construction misclassification (IC 22-1-1-22) and a separate process for independent-contractor exemption certificates in workers' compensation.

If the person is an employee, use the true-cost calculator and the first hire checklist: EIN, W-4, I-9, new-hire report, withholding and unemployment registration, workers' comp, and payroll. Partner links if you set up payroll: Gusto or Paychex. For legal documents, consider talking to an Indiana-licensed attorney; a partner link is LegalZoom, which is not a substitute for advice on your facts. For payroll setup, see how to run payroll for one employee and our Gusto vs Paychex comparison. For legal documents, talk to an Indiana-licensed attorney; this page is not a substitute for advice on your facts.

Misclassification can mean back employment taxes and, under the FLSA, unpaid wages, liquidated damages, and civil money penalties. This page is a summary of published IRS and DOL guidance, not a determination of any worker's status.