Series: HR Law Without an Attorney · Host: Kerri Roberts
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Episode Summary
Calling someone a 1099 contractor does not make them one. The IRS does not care what you wrote on the agreement when you started working together. It cares about who carries the control. If your contractor works 40 hours a week, only for you, on your schedule, with your tools, you probably have an employee you aren't paying taxes on. The good news is that this is fixable, and it can be fixed calmly. In this episode of Don't Waste the Chaos, Kerri Roberts walks through the three control buckets the IRS uses (behavioral, financial, and relationship), why the IRS, the Department of Labor, and some states can each reach a different answer about the same worker, and what a misclassification can cost a small business. She also shares a one-page control checklist and a simple way to use AI to flag risky contractor agreements. You don't get to choose whether you pay payroll taxes. The facts choose for you.
In This Episode
Why the label on your agreement doesn't decide whether someone is a contractor or an employee
The three IRS control buckets: behavioral control, financial control, and the relationship
How a contractor relationship can quietly drift into an employee relationship over time
Why you can pass the IRS test and still fail the DOL economic reality test or a state ABC test
Why hiring remote workers in California, Massachusetts, or New Jersey can pull their rules onto you
What misclassification can cost: back taxes, doubled penalties when 1099s weren't filed, back wages, and personal liability
The Missouri gut check: $15 minimum wage, non-waivable overtime, and final pay timing
Kerri's one-page control checklist, and how to use AI to audit your old contractor agreements
Chapter Timestamps
0:00 A 1099 label doesn't make a contractor
2:21 HR law without an attorney: the three control buckets
4:44 Financial control and relationship (a real contractor story)
7:04 When your 1099 has quietly become an employee
9:19 Three tests that can disagree: IRS, DOL, and the ABC test
11:31 What misclassification actually costs
13:51 Why compliance comes before culture
15:56 The Missouri gut check
18:23 The one-page control checklist and how to use AI
20:37 Your next step and what's coming next week
Resources Mentioned
The HR Easy Button (book): saltandlightadvisors.com/thehreasybutton - paperback, hardback, and Kindle on Amazon
HR Foundations (course, under $400): saltandlightadvisors.com/hrfoundations
Companion blog post: Your 1099 Agreement Is Probably Out of Date - saltandlightadvisors.com/blog
Your Action Item
This week, pull a list of your 1099s and circle anyone who works only for you, on a schedule you set, using your tools. Find their agreements, drop them into AI, and ask it to flag anything that reads like employee behavior. AI can flag the patterns, but the final call belongs to a human: you, your HR advisor, or your attorney.
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Full Transcript
Calling Someone a 1099 Doesn't Make Them One
Calling someone a 1099 contractor does not make them one. Did you know that? The IRS does not care what you wrote on the agreement you gave them when you first started partnering. It cares about who carries the control, and today we're going to get into what control actually means. So if you've got a contractor who works 40 hours a week, only for you, on your schedule, using your tools and technology, you probably don't have a contractor. You have an employee you're not paying taxes on. But there's good news. We can get this cleaned up. It's pretty fixable, and it's fixable in a calm way. So let's sort out who's who, so somebody else isn't doing that for you. Welcome back to another episode of Don't Waste the Chaos. I'm your host, Kerri Roberts. I've been in HR for well over 20 years now. I was in corporate for a long time and then went out on my own about three and a half, four years ago, focusing on building the HR foundation for small to mid-sized businesses. I also do this podcast because I want to bring this kind of practical information straight to you. I know it's hard to understand. So let's get into it.
A Quick Honest Note
One quick honest note before we start: this is HR education. It's not legal advice. I'm not an attorney. Employment law can be federal, it can be state, and sometimes it can be city or county. And as you're going to see today, it changes quickly, if you haven't noticed that already. So for your company, you need to check your state labor laws and the federal laws, and maybe loop in an employment attorney. That's not just me covering myself, even though it is maybe a skosh. It's also knowing when to pull in the right expert, and that has a lot to do with the work I do. Sometimes you need to pull in the right expert because you don't have that expertise in your business.
Where I Get My Data
One other quick note. I was looking at some of the comments on my YouTube videos the other day, and somebody said, "People make these big quotes all the time and they never cite their sources." Listen, if you want to know where I'm getting some of this data, a lot of times I say it in the episode. But if you're just watching a YouTube short, you might miss that. If you want the data, shoot me a message. I'm always happy to share where I get it. A lot of times I'm pulling it directly from the Department of Labor or the IRS website, or from the Society for Human Resource Management. Sometimes it's from Forbes. It just depends on the content.
If you want to go deeper on any of this, I would love to engage with you about this topic, because most of the time when I tell somebody I've made HR my life's work, they say, "I'm sorry for you. I would never want to do that." Now, I don't feel that way. God made me this way. It's a really good fit for me. But I get it. So whenever anybody wants to engage, I'm all ears. If I share some data and you're thinking, "Girl, where are you even getting that?", shoot me a message or drop a comment. Just know that if you call me out on a YouTube short or any of my videos, I'm going to have something to say, because I read every single comment myself. I'm just a small business out here trying to make it. So before you put me on blast, think about that. Okay, I digress.
It's the Control, Not the Label
Let's get back to 1099 contractor versus employee. If you haven't subscribed to my channel, I'm in the middle of a series about HR law without an attorney and how you can address it. I know most small to mid-sized businesses might have an attorney friend, but a lot of them aren't using an employment attorney. So I'm here to help you in that area based on what I've seen as a 20-year HR pro. When it comes to whether a person is a 1099 contractor or an employee, it's not the label you put on it. It's the control. I mentioned this in the intro, and it's all about the control. There are three buckets that essentially define control. The first is behavioral control, the second is financial control, and the third is the relationship. This is how the IRS determines whether a person is actually a 1099 contractor or should be a W-2 employee, and in my opinion that matters a lot more than how you've labeled them. You don't get to choose whether or not you pay payroll taxes. That's chosen for you. The IRS uses a common law test with these three buckets, so let's get into each one.
Behavioral control is what work is done, how it's done, and when it's done. Start thinking about your contractors. Are you telling them what to do, when to do it, and how to do it? If you're dictating those things, that's usually an indication of an employee.
Financial control is whose tools they're using, who's covering the expenses, and whether they can make a profit or take a loss. I usually ask: whose computer are they working on, and what software are you telling them to use? Are you issuing them a laptop and telling them which CRM they have to use? You're starting to see some red flags there. Think about that with your contractors.
The relationship is what benefits they have, how permanent the role is, and whether the work is core to your business.
A Story From My Own Business
I even had this come up in my own business a couple of years back. An individual reached out who wanted to be an HR consultant alongside me. I had some overflow work at the time, which I do from time to time, so I was open to it. She was going to use her own tech and set her own hours. I was essentially going to refer my overflow business to her. She could also bring in her own clients and use my business name, credibility, and contracts, and payment would run through my QuickBooks. It sounded pretty good. It was a contractor relationship, and that's exactly what she wanted. But over time, I wanted her to start attending meetings. I wanted her to report out on what was in her pipeline. I wanted her to follow my chosen processes and procedures and my frameworks. So I called her and said, "Based on where I want this to go, this really needs to be a W-2 employee role." If that wasn't a good fit for her, that was totally fine with me. We parted ways, but that's important.
It's not just about preference. A lot of people love the gig economy and want to go out on their own, and I get that. I'm an entrepreneur myself. It's a really good fit for me, and I don't want to be a W-2 employee for anyone either. But it's not just something you get to pick. I've even worked with a client who wanted me to attend meetings, wanted to set the hours I worked, and required me to communicate through her company email. She wasn't giving me any benefits, and of course I was a 1099. I told her multiple times, "Hey, you're treating me like an employee. You're going to owe me overtime and back taxes and all of those things." She didn't listen, and she's no longer a client, because she wasn't a very good fit for my perspective on HR. That's totally fine. You get to run your business the way you want to. It's my responsibility to tell you what the risks are and what the correct way to do it is, based on my interpretation of the law. Then you get to go do your thing, because that's what business ownership is. You just also have to carry the risks.
So that's the first test: those three areas of control set by the IRS.
Here's what I want to say on this. So many of you will bring on a graphic designer or a social media person and 1099 them. You're a small business. You don't need a full-time person. But now that 1099 has been with you for two years. She sits in on your Monday morning meetings, gets told what to do in a lot of different areas, and has to use your technology. That's typically not a contractor. That's a W-2 employee you're handling incorrectly. If you truly can't tell, you can file what's called a Form SS-8 and ask the IRS to make the call for you, if you're willing to draw that attention. Usually by the time you're doing that, it's because you already know, or the contractor already knows. But it's another option if you can't quite make the determination and you don't want to reach out to an HR consultant or an attorney.
When the Tests Don't Agree
Now, this isn't one test. It's three, and sometimes the tests don't agree. I don't even love explaining this to you, but this is the complexity I've seen, and no one really tells small employers this. So I'm just going to be honest about how it works. You can be a legitimate contractor for tax purposes under the IRS common law test, but be an employee for overtime and minimum wage under the Department of Labor's economic reality test. And then there's a third test that's only used in some states, called the ABC test. If you pass one but fail another, you're still on the hook. I know. If this is complicated to me, I expect it to be about as clear as mud for you. But that's the reality, and you need to know all of it exists.
And the laws change fast. The Department of Labor's 2024 rule, a six-factor, look-at-everything test, is still on the books right now. But in February 2026, the Department of Labor proposed throwing it out and going back to a friendlier version built around two main factors. The government itself estimated that would move somewhere between 250,000 and 750,000 workers into the contractor column. And it's not final. It hasn't been finalized, which is exactly my point. You cannot set this once and forget it. Just like a lot of other HR, compliance, and regulatory law, it's a moving target. You've got to stay on it.
The ABC States
Then there's the state curve. I mentioned the ABC test earlier, and if you listen to me regularly, you know I call out the same states all the time for their uniqueness. Today I'm talking about California, Massachusetts, and New Jersey. They use the ABC test, where your worker is presumed to be an employee unless you can pass all three prongs. Prong B is that the work is outside your usual course of business. Think about that HR consultant I mentioned. I own a consulting firm called Salt & Light Advisors, and the primary crux of my business is HR consulting. So I had her as a contractor doing HR consulting, which is the primary work of my business. That's prong B, and that's the one that sinks most people. New Jersey just locked the ABC test into regulation in October 2026, which is when I'm recording this episode. Missouri, where I do the majority of my HR consulting, is not an ABC state. I'll talk more about our state in a minute. But if you hire anybody remote in any of those states, those rules reach you too. You need to know what that looks like, especially with so many remote workers being hired.
What Misclassification Actually Costs
Here's the dollar figure that comes with all of this, because you know I'm always saying HR metrics are finance metrics. There's always a dollar figure attached. Misclassification is not just a technicality. It's a number with your name on it. Unfortunately, as the business owner or senior leader, even if you get it wrong by accident, the IRS can still bill you 1.5% of what you paid that person, plus 20% of their share of Social Security and Medicare. Did you forget to file the 1099? If so, those figures double. They go from 1.5% to 3%, and from 20% to 40%, plus roughly $50 for every W-2 you should have filed for them. And friends, this is just the general version.
On the wage side, the Department of Labor can make you pay back overtime. I've talked about this on previous episodes because I've seen it happen in an organization I was part of. They can go back two years, or three years if it was willful, meaning they think you were intentionally misclassifying people. In the organization I was in, it was an accident. We had run it through the criteria and thought we were correct. We were not. That was early in my HR career, and it was a painful one. So that's two years, three if it's willful, and then it can be doubled as liquidated damages. Owners, or whoever runs your payroll, can also be held personally liable for unpaid taxes. Not just the business. The fact that the business owes it doesn't always save you, which is also bananagrams, but that's the reality. Somebody has to take personal responsibility. One misclassified contractor who should have been an hourly worker can turn into a five-figure cleanup. I have seen this happen. I saw it happen with an entire department, and that was brutal. That's the real cost of "We're just going to 1099 them. They want to be a 1099, and it's easier for us." There's a real cost to that.
Foundations Before Culture
This is foundational work. This is not about the culture of your business. So many people want to focus on culture, and I talk a lot about the 13 HR foundations. If you haven't picked up my book, I'd love it if you would. The HR Easy Button is the first of a series of three, and it covers the HR foundations. The foundations are foundational, it turns out. Everybody's got to have them, regardless of the size of your organization. The next book, and the next segment of coursework, is called HR Operating System. The coursework is already out, and the book is coming. The third segment is Strategic HR. That coursework is also already out, and that book will be out later. It's already written, just not edited. You can find all of the coursework at saltandlightadvisors.com/resources.
Everybody wants to jump to strategic HR, which includes culture, leadership development, workforce planning, and all of that. But you can't jump there if the foundation isn't in place. If somebody feels like they're misclassified, throwing them a pizza party isn't going to fix it. Neither is sliding them a t-shirt across the desk you've assigned them to, a desk they shouldn't be assigned to because they're a contractor. If you're making them sit there for a certain number of hours using your technology, you get my point. When we misclassify our people and miss the legal, compliance, and regulatory side of having employees, we can do all the fun cultural stuff we want, but we're missing the mark. It's foundational to the business. If you get it wrong, people can feel it. So don't throw the pizza party until you've made sure your compliance is in check. I love where your heart's at, but it's not going to fix it all.
The Missouri Gut Check
Let me do a Missouri gut check, since a lot of my HR consulting is in the state of Missouri. We always start with the federal floor and then look at home. If federal is more stringent, we follow federal. If your home state is more stringent, we follow your home state. Here in Missouri, the Division of Employment Security uses what's called the IRS 20-factor test. Same idea: it's all about the right to control the work. If the state reclassifies your contractor as an employee, you owe employment taxes on that person, and the federal side usually comes right behind that. Here's why, in my opinion, it stings a lot in Missouri. Right now, federal minimum wage is $7.25, but Missouri's minimum wage is $15 an hour in 2026. I don't know when you're listening to this, but in 2026 it's $15 an hour. I know every year workers want the floor to go up. From an employer perspective, that makes it tough. I recommend basing pay on the role and what the role is worth, but I digress. That's a whole different episode. So it's $15 an hour in 2026, and overtime is time and a half for anything over 40 hours. That's non-waivable. A misclassified worker in Missouri isn't just owed back taxes. They can be owed minimum wage and overtime too. That makes sense, right? That's what they were due if they were actually an employee.
You also want to know what happens when a worker leaves. If somebody is terminated and they ask for their pay at the time of termination, you have to give it to them. Technically you have seven days. Otherwise, you can pay them through your normal means, like direct deposit. But if the worker says, "I want my pay," you've got to go cut them a check. The time of dismissal is not a great time to figure out that they should have been an employee and you had them classified as a 1099. That's often when I see this come up. You'll tell a contractor, "Okay, we're going to discontinue this," and the contractor will say, "I should have been an employee the whole time." Now you've got a mess on your hands, and a lot of times they're not wrong.
My One-Page Control Checklist
Here's what I do with my clients. I use a one-page control checklist before I sign off on whether someone is a contractor. I'll be totally frank. With so many of my clients, I'll say, "Hey, I think this person needs to be a W-2," and they don't even want me touching their contractors. Those are agreements they've already made, and that's not really what they want me for. I get that. You get to run your business however you want. But I always like to go through it.
My one-pager usually covers:
Who sets the hours?
Whose tools and equipment are they using?
Can they work for other clients?
Is what they're doing core to what the business does? For an HR consulting firm, for example, a marketing person wouldn't be core to the business.
How long has this "temporary" engagement run?
Five honest answers to those, and pretty quickly I can tell you what the classification should be, or what the IRS would likely say, faster than any legal memo.
How to Use AI for This
Here's what you can do with AI. Have AI draft a clean independent contractor agreement for your state, your industry, and an organization of your size, and have it flag the clauses that scream "this is actually an employee." I would also go back through all your old 1099 contractor agreements. Gosh, I hope you have agreements. Put each one in and say, "Flag anything that looks like employee-type behavior so I can start an audit on this." That's how I would use AI. AI can flag the patterns. It doesn't make the final call. That's for you, me, your attorney, whoever else. That's for a human. The determination is the gray area. But AI can flag some things to get you started, and I really think you should do that.
Your Action Item This Week
So this week, pull a list of your 1099s. Circle anyone who works only for you, on a schedule you set, using your tools. Those are the people to start with. Go find their agreements, put them into AI, and ask it to flag anything it sees. That's a great place to start. And if you're listening to this thinking, "Girl, I don't have time for that. I'm trying to run my business," give me a call. Or take my free HR audit. It's a great way to see where you're at from a compliance and regulation perspective, and it takes about 10 minutes. You'll find it at saltandlightadvisors.com/hraudit.
What Working With Me Looks Like
Or if you're thinking, "Actually, I know I've got some risky areas," let's jump into the full comprehensive audit. That's about a month-long engagement. I usually recommend we start with the audit but go ahead and block out the months after it on my calendar, so we can tackle the findings. Usually you're not coming to me saying, "I bet this is all going to be perfect. Will you audit me?" It's more like, "I know we've got some things out there. I don't even know what I don't know. Will you audit me?" So let's go ahead and block that calendar. I usually set up a six-month engagement with clients. The first month, we focus on the audit. The next five months, we tackle what came out of the audit. Around month four or five, I'll say, "Here's what we've done. Here's what's outstanding. Do you want to extend, or are you ready to take it on yourself?" That's what it looks like to work with me. I'm not a sales girly, even though I've gotten pretty good at it. I'm an HR pro. That's what I do for a living. I just want to be honest with you about what your foundation looks like. That's why I named my business Salt & Light. Salt is the wisdom, the truth, the knowledge. Sometimes that's hard to hear, but it's the reality. The light is the encouragement and the path forward, and I'll help you move forward.
Next Week: Handbooks
Next week, we're continuing this HR law series with handbooks. I've put out episodes like this before, but you always need to hear it. I want to tell you what has to be in writing before you need it. Here's an example: you get a no-call, no-show, and all of a sudden you want to write a policy to address it. Let's address those things in advance. Then we rely on the policy when issues come up, and we grant an exception if we need to, making sure we're not being discriminatory. Listen, I know this work can be complicated, and it can feel like another part-time job. That's why people like me exist: to support you so you can run your business. But one thing I will tell you is that the work is worth it. So don't waste the chaos. Embrace it. I hope to see you next week.
Resources To Keep Building
Not sure where your classification and compliance gaps are? Take the free HR Audit to see where your people systems stand. → saltandlightadvisors.com/hraudit
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