The modern workforce is changing fast. Between remote work, freelancing, and side gigs, more companies rely on independent contractors than ever before. That flexibility is great  until worker classification mistakes lead to tax penalties and compliance issues. 

Here’s what every employer should know to stay compliant and confident. 

Why Classification Matters

Classifying someone as an employee or independent contractor determines taxes, benefits, and legal protections. 

• Employees: You withhold payroll taxes and provide benefits. 
• Contractors: They handle their own taxes and don’t receive employee protections. 

If you get it wrong, you could face back taxes, fines, and potential audits. 

Journey Tip:

“If it looks, walks, and works like an employee, it probably is.”

The Three Key Tests 

The IRS focuses on control and independence to determine status: 

• Behavioral: Do you direct how, when, or where they work? 
• Financial: Who provides tools or covers expenses? 
• Relationship: Is the work ongoing and integral to your business? 

If your company sets the rules and expectations, you likely have an employee not a contractor. 

State Rules Can Be Stricter 

Some states use the ABC Test, which presumes a worker is an employee unless all three are true:

A. They’re free from your control.

B. Their work is outside your core business.

C. They run an independent business. 

This means a contractor doing similar work to your company’s services is often considered an employee in states like California and Massachusetts. 

Red Flags to Watch For 

Be cautious if your “contractors”: 

• Work regular hours or under daily supervision. 
• Use your tools or systems. 
• Are paid hourly. 
• Only work for your company. 

Each of these can signal an employment relationship in the eyes of regulators. 

How to Stay Compliant 

• Audit classifications regularly. 
• Use clear contracts that define independent work. 
• Keep records like invoices and business licenses. 
• Stay informed  laws evolve constantly. 
• Partner with experts who understand payroll and HR compliance. 

Journey Can Help 

At Journey Payroll & HR, we help businesses navigate gray areas in worker classification with clarity and confidence. From audits to 1099 management, our team makes compliance easy so you can focus on running your business. 

Need a quick compliance check? Let’s make sure your payroll setup is right from the start.