Classifying your workforce correctly is one of the most important responsibilities for any trade employer—and getting it wrong can be costly. Trade Hounds partners with Ironvest, which offers an employee benefits marketplace for the trades.
In this discussion with isolved, their payroll and HR services provider, they break down what businesses need to know about workforce classification, including differences between 1099 contractors and W-2 employees, IRS guidelines, and best practices for compliance.
In this Q&A, isolved’s Zach Baker, HR Consultant, and Heather Plancarte, Senior HR Consultant, share practical insights, real-world examples, and actionable advice to help trade businesses stay compliant, protect their bottom line, and make informed decisions when managing their workforce.
Zach Baker
Many of you may be contractors yourselves—1099s, W-2 employees, or business owners employing W-2s with some 1099 contractors on the side. You may be asking: What is a contractor? What is an employee? What’s the difference?
The challenge is that there have been many IRS changes over the last several years, along with audits and regulatory updates. This has created a lot of gray area, especially in the trades. Today, we’ll walk through IRS guidelines and what they look at when determining whether someone is a 1099 contractor or a W-2 employee.
Heather Plancarte
We often hear the phrase “1099 employee,” which is essentially a contradiction. A 1099 is a contractor, not an employee.
A 1099 contractor controls their own work and hours and does not take direction from the employer. A W-2 employee, on the other hand, is hired by the company. The employer pays payroll taxes and has control over presentation, direction, scheduling, and provides resources to help that employee succeed.
Heather Plancarte
If someone is misclassified, the IRS and Department of Labor can come back with back taxes, penalties, and even benefit liabilities. If benefits were offered to W-2 employees and a 1099 should have been classified as a W-2, those benefits may need to be paid retroactively.
Zach Baker
There are three main factors:
Heather Plancarte
Behavioral control looks at whether you’re giving instructions, providing training, supervision, handbooks, or determining schedules. For example, in salons—a common comparison—if a stylist sets their own hours, books their own clients, and rents a chair, they’re more likely a 1099 contractor. If the salon provides tools, books appointments, and dictates schedules, that stylist is likely a W-2 employee.
For a construction company, are workers bringing their own tools, or are you providing them? Do they work independently, or do they have a supervisor overseeing them? Are you training them on your standards and quality expectations, or are they determining those themselves as an independent business?
Financial control examines how the worker is paid. Are they paid through payroll or by check per project? Are you filing W-2s or 1099s at year-end? Another key factor is profit or loss risk. If losing a worker would significantly impact your business financially, that person is likely a W-2 employee. Tool ownership also matters—if you provide all tools, that leans W-2.
Relationship focuses on benefits, contracts, and the worker’s role. Are they receiving benefits? Are they a core part of your business or management team? One misconception is that workers decide their classification. That’s not true—the business owner makes the decision and is responsible for it.
Zach Baker
One thing I always tell clients in the trades is this: as the employer, you can provide the timetable and expected outcome. But if someone is truly a 1099 contractor, you cannot control how the work gets done.
You can’t require them to clock in at 8 a.m. and leave at 5 p.m. like W-2 employees. You also can’t have someone doing the same work as a W-2 employee but classified differently without a clear distinction. If audited, you must be able to explain why classifications differ.
Heather Plancarte
With a 1099 contractor, you can end the relationship without explanation. With a W-2 employee, you need documentation—performance reviews, improvement plans, and records—especially if they file for unemployment or claim discrimination.
These differences also impact how you attract and retain talent.
Zach Baker
Transparency is critical. When I was 18, I took a job and didn’t realize I was classified as a 1099 contractor. I didn’t know my taxes weren’t being withheld.
If someone in that situation is let go and applies for unemployment or posts online about their experience, it can trigger audits and put your business at serious risk.
Heather Plancarte
Financial control focuses on payment, tools, and risk. A 1099 contractor is usually paid per project or milestone. They bring their own equipment, trucks, and tools, and they carry the risk of profit or loss.
A W-2 employee is paid hourly or salary. You provide materials, tools, and equipment, and there’s no financial risk tied directly to job completion in the same way.
Heather Plancarte
Ask yourself: how integral is this person to your business? Are they being trained, evaluated, and managed? Are they a core role?
You must be able to document and defend your classification decision from a legal standpoint.
Zach Baker
Under recent legislation, a true 1099 contractor should not have you as their sole source of income. They should be running an independent business, working multiple jobs, and using their own equipment.
Repeat contractors are fine—but they should still have other clients and operate independently.
Zach Baker
Classification isn’t permanent. Someone classified as a 1099 today may need to be reclassified as a W-2 in the future. You should regularly evaluate your entire workforce to stay compliant.
Zach Baker
Misclassification carries real risk. Fines can exceed $1,000 per worker, and even small businesses are affected.
Heather Plancarte
Significant tax liabilities can accrue—Social Security, Medicare, unpaid payroll taxes, plus interest. There’s also the risk of lawsuits from workers seeking benefits they should have received. Beyond that, misclassification damages trust and morale. When workers feel uncertain about their status, productivity and retention suffer. That doubt can spill into reviews and reputation damage, creating a snowball effect.
Zach Baker
There are hard costs and soft costs. You may not see morale issues on a P&L, but you’ll see them in missed deadlines, lost talent, and stalled growth. It’s also important to remember that this isn’t just federal. State laws vary, and compliance depends on where you operate.
Heather Plancarte
Misclassification impacts not just productivity but also the time and resources required to manage audits, legal responses, and compliance. These soft costs can have a longer-term impact than direct financial penalties. For many small businesses, even a small, unexpected expense can affect payroll or project completion.
Zach Baker
To put this in perspective: 10–30% of businesses misclassify workers. Last year alone, the Department of Labor recovered $42 million in back taxes.
Penalties can include criminal charges for willful violations. I strongly advise against cutting corners to save money today—it will cost you tomorrow.
The trades, as part of the growing gig economy, are under increased scrutiny. Businesses may be liable for up to 41.5% of back wages and taxes. Construction is one of the most closely monitored industries.
Heather Plancarte
It’s easy to focus on growth and revenue and let compliance slip. But one audit can open the door to many more. I like to joke that you don’t want the government crawling through your business. The key is asking the right questions now to avoid that situation later.
Zach Baker
This isn’t hypothetical—this is happening every day. Businesses of all sizes are being penalized, even those with as few as 50 workers. Make sure you’re doing this properly.
Getting workforce classification right is critical for any trade business. Even experienced companies make mistakes, and small businesses are especially vulnerable. Partnering with experts helps ensure employees and contractors are classified correctly, keeping your business—and your family—protected.
Through Trade Hounds’ partnership with Ironvest, skilled tradespeople and small business owners can access health insurance, retirement plans, payroll services, and more. Explore the marketplace today to find solutions that fit your business and workforce, and take steps toward protecting your team and your bottom line.
About Trade Hounds
Trade Hounds is America’s largest and most engaged community built exclusively for skilled tradespeople. With hundreds of thousands of users across construction, electrical, plumbing, HVAC, welding, and more, the platform helps workers showcase their skills, share jobsite insights, connect with employers, and access critical resources that support their careers. Trade Hounds is committed to elevating and empowering the trades workforce through technology, community, and opportunity.
About Ironvest Financial Partners
Ironvest is an employee benefits marketplace designed to make essential benefits accessible and affordable for small businesses, independent contractors, and growing teams. Through its streamlined platform, Ironvest offers health insurance, retirement plans, payroll tools, and business insurance solutions—giving workers and employers an easy, transparent way to secure the protections they need. Ironvest’s mission is to democratize access to benefits traditionally available only through large employers, ensuring every worker has a path to financial security and well-being.
About isolved
isolved is a leading platform to help businesses manage payroll, HR, benefits, and workforce compliance. Serving organizations of all sizes and industries, iSolved combines powerful technology with hands-on expertise to help employers navigate complex regulations, reduce risk, and support their people effectively. Through its software, services, and HR consulting team, isolved empowers businesses to stay compliant, streamline operations, and focus on growing with confidence.