Bobadilla v. 1099
On independent contractors, employees, the difference between the two, and why it matters more than most founders think.
The question isn't what you call them. It's what the relationship actually looks like.
You can write "independent contractor" on every invoice, every agreement, and every internal spreadsheet. You can issue a 1099 at the end of the year and feel like you've handled it. None of that determines the classification. The IRS, Washington State, and your accountant all have opinions about what the relationship is, and none of them care what's on the invoice.
Most founders don't find this out until it's already become very expensive.
How To Tell Which One You Actually Have
Here's the simplest frame I know. If you want to tell someone how to do the work, you probably need an employee. If you want to tell someone what needs to be done and let them figure out the rest, a contractor might work.
Most founders think they're safely in the second category. Some of them are wrong. Not because they're trying to misclassify anyone, but because the line between directing the work and directing the outcome is blurrier in practice than it sounds in theory.
Let me show you what that looked like in my own business.
While running Hummingbird Studios, I had an instructor named Birdie. Birdie had a key to the studio. She made her own appointments, chose her own clients, designed her own sessions, and taught what she wanted the way she wanted to teach it. I had no say in her music, her repertoire, her methodology, or her schedule. She was a contractor through and through, and the classification matched the reality of how we worked together.
Most studios don't run that way. Most studio owners have opinions about the music, the class structure, the client experience, the required training, the team meetings, the repertoire. They want a say in how it gets done, not just what gets done. That's a different relationship. It doesn't matter what the agreement says. If the owner is controlling the how, the relationship looks a lot more like employment than independent contracting, and the classification should reflect that.
Now imagine if I had run things differently with Birdie. What if I had required her to teach specific exercises in a specific order? What if I had told her which clients she was seeing and when? What if I had mandated that she attend weekly staff meetings, use only approved music, and complete additional training I selected and scheduled? What if I had set her rates and controlled her client communication? What if her sessions were interspersed through my normal open hours?
That version of Birdie isn't a contractor. That's an employee. Same person, same studio, completely different classification based entirely on how the relationship actually works day-to-day.
The Rules
There are two frameworks worth knowing. They're not identical and they don't always reach the same conclusion, which is part of what makes this genuinely complicated.
The IRS uses a common law test organized around three categories. Behavioral control, meaning does the business control how the worker does the job, the tools they use, where they work, the order of tasks, the training they receive. Financial control, meaning does the business control the economic aspects of the work, whether the worker can work for others, how they're paid, whether expenses are reimbursed, whether they can make a profit or loss. And type of relationship, meaning: Are there written contracts? Employee benefits? Is the relationship permanent or project-based? Is the work a key aspect of the business?
No single factor is determinative. The IRS looks at the totality of the relationship. But the more control you have over the how, the how much, and the how long, the more the relationship looks like employment.
Washington State uses an ABC test for certain purposes including unemployment insurance and workers compensation. Under the ABC test a worker is presumed to be an employee unless the hiring business can establish all three of the following. A, the worker is free from control and direction in performing the work. B, the work is either outside the usual course of the business or performed outside all places of business of the hiring entity. C, the worker is customarily engaged in an independently established trade, occupation, or business. All three. Not two out of three. All three.
The B prong is the one that trips people up most often. It requires that the work be outside the usual course of the hiring business or performed outside all places of business. Birdie taught Pilates and I ran a Pilates studio, so her work wasn't entirely outside my usual course of business. What made her situation defensible was the specifics. She saw clients who wanted appointments outside normal business hours, maintained her own client relationships, and operated with full methodological independence. That combination puts the analysis in a reasonable place, though I'll be honest that it sits within my personal risk tolerance rather than in a zone of complete certainty. Worth knowing before you assume your own classification is clean, because the world rarely gives you a clear yes or no. It gives you a facts and circumstances conversation.
The Tax Reality, Very Briefly
When you have an employee, you pay their wages and you also pay the employer's share of Social Security and Medicare taxes, contribute to unemployment insurance, carry workers compensation coverage, and provide whatever other benefits apply under Washington law, which includes paid family and medical leave among other things. All of those are costs that don't appear on the invoice. They appear in your actual cost of having that person working for you.
When you have a contractor, they handle their own taxes, including self-employment tax which covers both the employee and employer share of Social Security and Medicare. You issue a 1099 at year end if you paid them $600 or more. You don't provide benefits, you don't pay unemployment, you don't carry workers comp for them.
The difference in cost is real and it's one of the reasons misclassification happens. A contractor looks cheaper on paper. When the classification gets challenged and the back taxes, penalties, interest, and benefits liability come due, the math changes significantly. Employee protections under applicable law don't disappear because you called someone a contractor. They apply based on what the relationship actually was.
The Independent Contractor Agreement
If the classification is genuinely contractor, you need an agreement. Not because a piece of paper changes the classification, it doesn't, but because the agreement sets expectations, defines the scope, and protects both parties when something goes sideways.
Three things I consider non-negotiable in any independent contractor agreement.
Services definition. A good services definition makes the boundaries of the engagement clear enough that you can say with confidence whether you did or didn't get what you contracted for. Vague scope creates disputes. If you have an ongoing relationship with varying projects and prices, consider a Master Services Agreement with individual Statements of Work attached. That structure lets you define the consistent terms once and adjust the scope and price per project without renegotiating the whole agreement each time. Invoicing and payment. When do they invoice, what do the invoices need to include, when do you pay, what happens if there's a dispute about an invoice. These feel administrative until they're not. Confidentiality. More on this in a moment, but it belongs in the agreement.
Two things I always like to see from a contractor, even if I can't always require them.
Their own LLC and their own insurance. The LLC tells me they've done at least the minimum administrative work to set up a real business structure, which says something about how seriously they take the engagement. The insurance tells me that if something goes wrong in the course of their work, there's coverage that isn't coming out of my pocket. Neither one changes the classification. Both of them change my comfort level.
The Brand Designer Exception - Tacoma Is a Small Town
I’m a lawyer, so I need to contradict myself here. Not every contractor engagement requires a comprehensive formal agreement before you start. Sometimes the texts and emails are enough to establish the commercial relationship and manage through most issues that come up.
What I worry about more than the contract, in certain situations, is confidentiality.
When I was building Hummingbird and then Understory, I worked with a designer on both brands. She did good work. I paid her. The commercial relationship was straightforward enough that a formal contract felt less urgent than other things on my list.
What I cared about more was confidentiality. Brand development means sharing business plans, positioning, strategy, things that aren't ready for the world yet. Tacoma is a small town. The South Sound business community is smaller than it looks and significantly more interconnected than people realize. People talk. People are chronically online, posting from wherever they are, of whatever they're working on, before it's approved or launched or ready.
Get the NDA first. The commercial relationship can often manage itself. The confidentiality exposure is harder to unwind after the fact.
The Most Commonly Asked Questions
Can I just have them sign an independent contractor agreement and call it done? No. The agreement doesn't determine the classification. The reality of the relationship does. A contractor agreement in an employee relationship is just a document that will make the eventual conversation more complicated.
What happens if I've been misclassifying someone? It depends on how long, how much, and how the classification is challenged. The exposure includes back payroll taxes, the employer's share of FICA, interest and penalties, potential benefits liability, and workers compensation and unemployment contributions. Washington also has its own enforcement mechanisms. It's worth getting ahead of it rather than waiting for someone else to raise it.
Do I need a 1099 for every contractor? You're required to issue a 1099-NEC to any contractor who is an individual or single-member LLC that you paid $600 or more during the tax year for services. There are exceptions and the rules have some nuance, so confirm with your accountant for your specific situation.
Can a contractor work exclusively for me? Exclusivity is a factor that weighs toward employee status. If your contractor works only for you, on your schedule, doing work that is central to your business, the classification is worth examining more carefully.
What if they want to be a contractor? It doesn't matter what they want. Classification is determined by the reality of the relationship, not by mutual preference. Both parties agreeing to call someone a contractor doesn't make them one.
The Label Doesn't Decide
The word on the invoice, the agreement, the internal spreadsheet, none of it determines what the relationship actually is. The reality of how you work together determines that. The control you exercise, the financial relationship, the nature of the engagement, those are what matter to the IRS, to Washington State, and to anyone who ever has reason to look closely at how you've structured your workforce.
Know which one you actually have. If you're not sure, that uncertainty is worth resolving before someone else resolves it for you in a context you didn't choose and at a cost you didn't budget for.
- m
