Contractor or Employee? Reviewing Worker Classification Before Q4 Hiring
Q4 often brings a wave of seasonal and short-term hiring, and with it, a decision that's easy to get wrong under time pressure: is this person a W-2 employee or a 1099 contractor? Worker classification is governed by more than one federal standard at once, and getting it wrong carries real exposure on both the tax side and the labor side.
Two Different Tests, Two Different Purposes
For federal tax purposes, the IRS applies a common-law test built around three broad categories: behavioral control (does the business direct how the work is done, not just what gets done), financial control (who bears the investment and risk of profit or loss), and the type of relationship (is there a written contract, benefits, and an expectation of an ongoing relationship). Separately, for wage-and-hour purposes under the Fair Labor Standards Act, the Department of Labor applies its own economic reality test — and that test is currently in an unusual state of flux.
The DOL Test Is Mid-Transition Right Now
As of this writing, the Department of Labor's 2024 rule — a six-factor test with no single factor weighted more heavily — remains the rule of record, but the DOL is not actively enforcing it while a new proposed rule works through the rulemaking process. That proposed rule, published in February 2026, would revive an earlier, two-core-factor version of the economic reality test that gives more weight to the degree of control over the work and the worker's opportunity for profit or loss. The public comment period on that proposal closed in April 2026, and a final rule was still pending as of this writing. Until it's finalized, businesses should document their classification decisions carefully rather than assuming either framework is settled.
Satisfying One Test Doesn't Automatically Satisfy the Other
A worker correctly classified as a contractor under the IRS's common-law test isn't automatically correctly classified under the DOL's FLSA test, and vice versa — the two frameworks ask related but distinct questions, and a misclassification claim can arise under either one independently. This matters especially for state law too: many states apply their own, often stricter, test (some using an "ABC" presumption of employee status) that can diverge from both federal standards.
What to Document Before Q4 Hiring Begins
Before bringing on seasonal help, it's worth documenting, in writing, the specific facts supporting the classification decision: who controls the schedule and method of work, whether the worker uses their own equipment, whether they work for other clients, and whether the relationship is expected to be temporary or ongoing. This documentation matters most in hindsight — if a classification is ever questioned, having contemporaneous notes is far more persuasive than reconstructing the reasoning after the fact.
Form SS-8 as a Formal Option
For a genuinely close call, either the business or the worker can file Form SS-8 with the IRS to request a formal determination. This is a slower process and not always practical for a seasonal hire, but it's worth knowing about for a recurring role where the classification question keeps coming up year after year.
This information is educational and describes the general federal frameworks for worker classification, which remain partly unsettled at the federal level and vary further by state. It does not determine the correct classification for a specific worker or role. If you're bringing on seasonal help this quarter and the classification isn't obvious, it's worth a conversation before the first paycheck goes out — our advisory team can help you think through the specific facts.
Related service: IRS Resolution & Representation
Comments