1099 vs W-2 rules

First, keep in mind that the “general rule” is that business owners must issue a Form 1099–MISC to each person to whom you have paid at least $600 in rents, services (including parts and materials), prizes and awards or other income payments. You don’t need to issue 1099s for payment made for personal purposes.

A worker will be considered an employee of the “hiring entity” for purposes of the Wage Orders unless the “hiring entity” can establish all three of the following factors:

• The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact
• The worker performs work that is outside the usual course of the hiring entity’s business
• The worker is customarily engaged in an independently established trade, occupation, or business

The “hiring entity’s” failure to prove any one of these three prerequisites will be sufficient in itself to establish that the worker is an employee for purposes of the Wage Orders.

An independent contractor is self-employed. You enter into a contract with an independent contractor to do a specific role or complete a specific task. Contractors may set their own hours and use their own tools. They may even work for more than one business. Since they are self-employed, you do not withhold taxes from their paychecks; they pay their own taxes and provide their own benefits.

An employee is hired by your business under an employment agreement. You withhold taxes from their wages, train them, pay employment taxes for them, and may provide benefits. Because of this, you have more control over your employees — you dictate what they work on and when they work.