Hiring 1099 vs W-2: How to Hire the Right Way From Day One
Don’t wait for the IRS to tell you you’ve misclassified someone. Here’s what you need to know.
You’re finally ready to bring someone on.
Maybe a VA. A contractor. A team member to take work off your plate.
But now you’re staring at the hiring forms thinking:
“Should I send them a 1099… or do I need to put them on payroll?”
This isn’t just paperwork.
Classifying your team correctly is a legal requirement—and getting it wrong can cost you thousands.
Let’s make sure that doesn’t happen.
First, What’s the Difference?
1099 = Independent Contractor
They run their own business. You pay them for a service.
No benefits. No payroll taxes. No control over when or how they work.
W-2 = Employee
They work for your business.
You dictate hours, provide tools, supervise their work.
You’re responsible for payroll taxes, withholdings, compliance, and yes—benefits (if applicable).
When it comes to hiring 1099 or W-2, the real difference is about control, compliance, and responsibility.
Why This Matters (Yes, Even for Tiny Teams)
Misclassifying an employee as a contractor is one of the most common tax mistakes small businesses make.
If the IRS audits you and decides someone should’ve been a W-2?
You could owe:
Back payroll taxes
Penalties + interest
Potential legal fees if your worker challenges their classification
It’s not just a “big business” issue. It’s not just a “big business” issue. Even solo founders need to get hiring 1099 or W-2 right from the start.
Quick Litmus Test: 3 Questions to Ask
Do you control how and when they work?
→ Set schedules? Provide exact processes? That situation leans employee.Do you provide tools, equipment, or training?
→ Contractors usually use their own stuff and come trained.Are they working only for you?
→ If they depend solely on your business, you may have a W-2 situation.
If you answered “yes” to two or more… W-2 might be the safer bet when hiring 1099 or W-2 team members.
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What I See Too Often as a CPA
🧨 A founder hires someone “part-time,” pays them via Venmo, and calls it a day.
But they’re assigning hours, reviewing work, and requiring availability.
That’s an employee—period.
✨ A different client uses a contractor for graphic design. They send over deliverables, invoice monthly, and work for five other clients.
That’s a true 1099—and a clean setup.
The difference? Intentionality and understanding.
You don’t have to be perfect. You just have to do your due diligence with hiring 1099 or W-2 correctly.
So What Should You Do?
If you’re hiring support for the first time:
Start with clearly defined roles and expectations
Review the IRS 20-factor test (or better: talk to your CPA 👋)
Avoid defaulting to 1099 just to “save on taxes”—that can backfire fast
Clarity protects you. Compliance empowers you.
Bonus: How to Actually Hire the Right Way
✅ Use GUSTO (yes, this one) to handle payroll, taxes, and onboarding in one place.
✅ Use proper contracts—even for 1099s.
✅ Build hiring into your financial plan before you start cutting checks.
And if you’re still asking “can I afford to hire at all?”
That’s where I come in.
📊 Use the ProfitWay Dashboard to run the numbers, set a salary for yourself and your team, and stop the financial guesswork.
Or for expert strategy on team growth, tax compliance, and sustainable hiring?
→ Apply for 1:1 consulting via The Trendsetter.
Let’s build a team that grows your business—without draining your bottom line.
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This digital dashboard makes it easier than ever to visualize your business finances, set financial goals, and stay on track. Bonus: no expensive software or numbers knowledge required.
Disclaimer: While this guide provides valuable insights, it's important to note that every business has unique circumstances. For personalized advice tailored to your specific situation, please consult with a qualified financial professional. Our goal at CBFS is to empower you to make informed decisions that support your business growth and personal wealth-building objectives.
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