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One of the most common (and costly) mistakes I’ve seen nonprofits and small businesses make is misclassifying workers as independent contractors (1099) when they should be employees (W-2).
The intention is rarely malicious—often it's due to a lack of awareness or an attempt to save on taxes and benefits. But the consequences can be serious: back taxes, penalties, legal action, and lasting damage to your reputation.
🔍 Why Classification Matters
🔍 Why Classification Matters
Getting worker classification right isn’t just a formality. It affects your:
✔️ Legal obligations
✔️ Tax responsibilities
✔️ Liability exposure
✔️ Workplace protections
👩💼 W-2 Employees: You’re in Control
👩💼 W-2 Employees: You’re in Control
If your worker is a W-2 employee, you’re typically responsible for:
Withholding payroll and income taxes
Paying employer contributions (Social Security & Medicare)
Providing a safe, compliant workplace
Following labor laws (minimum wage, overtime, etc.)
Covering workers' compensation and unemployment insurance
Offering benefits (if applicable)
Key Factor: If you control what, how, and when the work is done, the person is likely a W-2 employee.
🧾 1099 Independent Contractors: Self-Directed Workers
🧾 1099 Independent Contractors: Self-Directed Workers
Independent contractors typically:
Decide how and when to work
Use their own tools and resources
Invoice for services
Serve multiple clients
Pay their own income and self-employment taxes
You can define the results, but not the methods used to get there.
⚠️ Misclassification = Big Trouble
⚠️ Misclassification = Big Trouble
Misclassifying workers can lead to:
❌ IRS and state fines
❌ Back taxes (employer + employee portions)
❌ Legal liability for unpaid wages and benefits
❌ Workers’ compensation and unemployment claims
❌ Public audits and reputational damage
✅ How to Get It Right
✅ How to Get It Right
Ask yourself:
1. Do you control how they do the work?
→ If yes, they’re likely a W-2 employee
2. Can they set their own schedule? Use their own tools?
→ Likely a 1099 contractor
3. Is the work part of your core operations?
→ Probably a W-2
4. Is the relationship ongoing and open-ended?
→ Leaning toward W-2
⚖️ Reminder: The IRS uses a 3-part test (Behavioral, Financial, and Relationship). Some states—like California—use even stricter standards like the ABC Test.
🧭 Need Guidance?
🧭 Need Guidance?
Visit the official resources:
💼 Final Thoughts
💼 Final Thoughts
Misclassification can derail your mission. It may seem like a shortcut now—but it’s a legal risk you can’t afford later.
At Athman HR, we help nonprofits and small businesses:
✔ Avoid classification pitfalls
✔ Build compliant hiring processes
✔ Train teams on HR best practices
🔹 Let’s Talk
If you're unsure how to classify your team, get in touch.
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