Ray gives Devin a 1099 every year. Devin works Ray's jobs all season, on Ray's schedule, with Ray's equipment, paid by the hour. What does the 1099 decide?

Nothing by itself; the working relationship decides, and it points to employee

That Devin is a contractor, because the form says so

That Devin is a contractor, as long as he signed a contractor agreement

That Devin is an employee only in weeks he works over 40 hours

Ray hires his nephew, a U.S. citizen, as a seasonal W-2 employee. Does Ray need a Form I-9 for him?

Yes; every employee needs one, citizens included

No, U.S. citizens don't need one

Only if the job lasts more than 90 days

A non-exempt crew member works 46 hours in one workweek. How many hours must be paid at least time and a half?

None, unless some of it was weekend work

When must the employer finish Section 2 of Form I-9?

Within 3 business days after the employee starts work for pay

By the end of the first pay period

Which set of facts points most toward an independent contractor?

Brings their own truck and striper, bids each lot and works for other contractors too

Works all season on your schedule, with your equipment, paid by the hour

Wears your company shirt, drives your truck and works only for you

Is paid weekly by the hour for the same work your crew does

Before paying a new striping sub, what should Ray get from them?

A Form W-9 and a certificate of insurance

Nothing until the end of the year

Lesson B101.7 · Business Finance 101: Run It Clean

Your first hire: employee or contractor?

5-minute read · Figures for tax year 2026

A road crew in safety vests and hard hats sweeps a freshly sealed highway lane with push brooms, a dump truck behind them — Photo: Grand Canyon National Park / Wikimedia Commons, CC BY 2.0

The short answer

The working relationship decides whether someone is an employee or a contractor, not the form you hand them. If you control how and when the work gets done, supply the truck and equipment, and keep them all season, the rules point to employee. Employees cost more than their wages and need a W-4 and an I-9 from day one. Contractors need a W-9 and, for 2026 payments of $2,000 or more, a Form 1099-NEC.

How the rules decide

Plenty of owners start by paying helpers on a 1099 because it's simple. The form doesn't decide what someone is, though. The IRS looks at three kinds of evidence and weighs the whole relationship:

The IRS looks at	Points to employee	Points to contractor
Behavioral control	You set the hours, the route and how the work is done	They decide how and when to do the job
Financial control	Your truck and equipment, paid by the hour	Their own equipment, bid by the job, can make or lose money
Type of relationship	All season, every season, doing your core work	A set job, other customers, their own insurance

Example. Devin works Ray's jobs all season, on Ray's schedule, on Ray's crack machine, paid by the hour. That points to employee, whatever form he gets. Luis, a striping sub, has his own truck, striper and insurance, bids each lot and works for other contractors too. That points to contractor.

If you're not sure, you or the worker can ask the IRS to decide on Form SS-8. The Labor Department, which enforces federal overtime law, uses its own test and has proposed a new rule that isn't final. States may use stricter tests for unemployment insurance, workers' comp and wage laws.

What an employee really costs

Example (made-up numbers, not a pay guide). For every $10,000 in wages:

Cost	Amount
Wages	$10,000
Employer Social Security and Medicare (7.65%, set by law)	$765
Unemployment insurance, federal and state (made-up figure)	$300
Workers' comp (made-up figure; it depends on your state and job class)	$600
Payroll service (made-up figure)	$150
Total	$11,815

That's about $1.18 for every $1 of wages, before any benefits. Your state, your workers' comp class and your payroll setup give your real numbers. Run them in the True cost of an employee tool.

Employees who aren't exempt also get at least 1.5 times their regular rate for hours over 40 in a workweek. Hourly crew members are generally non-exempt. Overtime law doesn't cover independent contractors, and a true contractor's price covers their own taxes, insurance and equipment.

Hiring an employee, step by step

Before day one: get workers' comp in place. Most states require it once you have employees, and your state sets the rules. Set up payroll and your state withholding and unemployment accounts.
Day one: the employee fills out a W-4 (and your state's form, if it has one) and Section 1 of Form I-9.
Within 3 business days: you complete Section 2 of the I-9 after checking their documents. Every employee needs one, U.S. citizens included. You keep it on file; it isn't sent to the government.
Then: report the new hire as your state requires.

If you pay a contractor instead, get a W-9 and a certificate of insurance before the first payment. If they won't give a correct taxpayer ID number, withhold 24%. File a 1099-NEC if you pay them $2,000 or more for 2026 work.

Your Move

Do this week

List everyone you paid this year who isn't on your payroll.
For each one, answer the three questions: who controls the work, whose equipment, and what kind of relationship.
Mark each one employee, contractor or not sure. Collect W-9s and certificates of insurance from the contractors.
Take the employee and not-sure names to your CPA or attorney before next season.

Log it: Classification check done.

Common questions

If a helper signs a contractor agreement, is he a contractor?

Not by itself. A contract is one piece of evidence. The IRS weighs the whole working relationship.

What if I've been paying helpers on 1099s who look like employees?

Talk with your CPA or attorney before next season. The IRS's Voluntary Classification Settlement Program lets eligible businesses move those workers onto payroll going forward, pay a reduced amount, and avoid a classification audit of past years. One condition: you filed their 1099s for the last three years.

Do I need workers' comp for one employee?

Many states say yes, and some set a minimum number of employees. Check your state's rules before the first day of work.

Watch out for

Paying helpers in cash with no paperwork. The rules still apply, and you're left with no records.
Using a sub with no certificate of insurance. At audit, an insurer may add what you paid them to your workers' comp payroll.
Skipping the I-9 for a relative or a friend's kid. Every employee needs one.

Free help

IRS: Independent contractor (self-employed) or employee?
IRS: About Form SS-8
USCIS: Form I-9 and Complete and correct Form I-9
Labor Department: Fact Sheet 23, overtime pay
IRS: Voluntary Classification Settlement Program

Free practice

Lesson check

5 questions on this lesson, one at a time, with the answer and the reason after each. Pass with 4 right, including every must-know question.

This is general education, not tax, legal, investment or insurance advice. Rules change and every situation is different. Check the sources below, and talk to a qualified professional before you act on it.

Sources

IRS: Independent contractor (self-employed) or employee?
IRS: About Form SS-8
Labor Department: Misclassification rulemaking
Labor Department: Field Assistance Bulletin 2025-1
Labor Department: Fact Sheet 13, employment relationship
Labor Department: Fact Sheet 23, overtime pay
IRS: Topic 751, Social Security and Medicare withholding rates
USCIS: Complete and correct Form I-9
IRS: Instructions for Forms 1099-MISC and 1099-NEC
IRS: Backup withholding
IRS: Voluntary Classification Settlement Program
Nationwide (an insurer's guide): Premium audit

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