Source: https://rivet.global/blog/1099-vs-w2-contractor-classification-us
Published: 2026-09-15 · Updated: 2026-09-15 · By Alexia M.

# 1099 vs W-2: classifying workers correctly

How US businesses decide if a worker is an independent contractor (1099) or an employee (W-2): the IRS control tests, state rules, penalties and remote workers abroad.

## Key takeaways

- The IRS looks at behavioural control, financial control and the type of relationship to decide if a worker is an employee.
- Some states, such as California, apply the stricter ABC test for state purposes.
- Misclassification can mean back payroll taxes, penalties and interest.
- Workers abroad are governed by their own country's employment law; a US 1099 does not apply to them.

"1099 vs W2" is one of the top completions after "1099". Founders ask because a contractor has worked full time for a year and now looks like an employee.

## The IRS tests

| Test | Questions |
|---|---|
| Behavioural control | Do you control how, when and where the work is done? Do you train them? |
| Financial control | Do they invest in their own tools, set their own prices, work for others, risk a loss? |
| Relationship | Is there a written contract? Benefits? Is the work ongoing and core to your business? |

No single factor decides. The overall picture does.

## State tests

California, Massachusetts, New Jersey and others use the ABC test for some purposes, which is harder to meet.

## The cost of getting it wrong

Back payroll taxes, the employer share of FICA, penalties, interest, and in some states, back wages and benefits.

## Workers abroad

A developer in Poland or Brazil is not a 1099 worker. Their country's law governs. Contractor agreements, invoices and local payments are the usual setup; for full-time roles, an employer of record may be safer.

## Paying contractors properly

Pay against invoices, not on a payroll schedule with fixed hours, and let contractors set their own tools and hours. The payment pattern is part of the evidence.

## Paying into the United States: the local rail

| What | Detail |
|---|---|
| Local rail | ACH for batch payments; RTP and FedNow for instant transfers |
| Run by | Nacha for ACH; The Clearing House for RTP; the Federal Reserve for FedNow |
| Settlement | Same-day ACH within the business day, standard ACH the next; RTP and FedNow in seconds, 24/7, where both banks take part |

Source: [Nacha: Same Day ACH](https://www.nacha.org/rules/same-day-ach-moving-payments-faster). Checked when this guide was last updated; the scheme's own page has the current figures.

## Where Rivet fits

Rivet pays contractors in the US and 120+ countries against invoices, on local rails, with each payout recorded to the payee. Rivet is not a bank; regulated partner institutions hold the funds. See [how to pay international contractors](/blog/how-to-pay-international-contractors).

## Questions

### What is the difference between 1099 and W-2?

A W-2 employee is on payroll with tax withheld and benefits. A 1099 contractor runs their own business and invoices you. The facts of the relationship decide which applies.

### Can I ask the IRS to decide?

Yes. Form SS-8 asks the IRS to determine a worker's status, though it can take months.

### What about the ABC test?

A stricter test used by some states. A worker is an employee unless they are free from control, work outside the usual course of your business, and run an independent business.

### How do I treat workers abroad?

Under the employment law of their country. Many companies use contractor agreements or an employer of record.