30% of US employers have misclassified at least one worker. Misclassification isn't just about W-2, 1099, or Corp-to-Corp. It's a complex area full of nuances, responsibilities, and consequences. One of the key issues for staffing agencies in the US - you have to contend with US *and* state laws, which can vary dramatically, and there is no bright line test between ICs and W-2s.
Here are the key considerations to think about for classifying between W-2s, 1099s, and Corp-to-Corp.
- W-2 employees should be your default classification for most staffing roles in the US
- Large staffing clients will often require staffing companies to have everyone as W-2 employees
- Independent Contractors (ICs) are often called "1099" or "Corp-to-corp"/"C2C". Legally there is no difference between these -- they are both independent contractors, but 1099 usually refers to individuals (who receive a 1099-NEC form) and C2C to ICs with an entity.
- If you misclassify someone as an IC, you could could owe back taxes (withholding, FICA, SUI) as well as any missed overtime.
- Misclassification is risky in the US because you have a lot of compliance surface area: class action lawsuits from workers, regulatory action from state and federal DOLs, state unemployment agencies, and the IRS.
- Some industries have many ICs (ERP developers), others (Light Industrial) do not.
- Even if you see staffing app platforms calling everyone an IC, that doesn't mean they are correct: many app-based staffing platforms are currently shifting their workforces to employees, often using EORs like Ascen
There's an easier way:
Consider leveraging an Employer of Record (EOR)/Agent of Record (AOR) solution to manage classifications accurately, ensuring compliance while reducing administrative overhead.