Hiring Toolkit: W-2, 1099, or Do It Yourself
Decide whether to keep doing the work yourself, hire a contractor, or hire an employee. Compare the true cost, avoid misclassification, and onboard the right way, with California notes.
Tailor this toolkit to your business
Are you ready to hire?
Check the statements that are true for you
If you checked four or more, you're likely ready. If cash is the missing piece, start with a contractor for a defined project, or run the new hire calculator to see how long a hire takes to pay for itself.
Do it yourself, contractor, or employee?
| Do it yourself | 1099 contractor | W-2 employee | |
|---|---|---|---|
| Best for | Small or occasional tasks, or while cash is tight | Specialized projects with a clear result (a website, bookkeeping cleanup, a design) | Ongoing work you direct: set hours, your methods, part of daily operations |
| Who controls how the work is done | You | The contractor decides how, when, and where | You do |
| Your cost beyond pay | Your time and missed growth | Usually none; they handle their own taxes and tools | Payroll taxes, workers' compensation insurance, unemployment insurance, often benefits and paid sick leave |
| Paperwork | None | Form W-9, written agreement, Form 1099-NEC at year end | Forms W-4 and I-9, state new-hire report, payroll registration, wage statements |
| Main risk | Burnout, a ceiling on growth | Misclassification penalties if they're really working like an employee | Fixed cost when sales dip |
Classify workers correctly
The IRS looks at three areas to decide whether someone is an employee or a contractor: behavioral control (do you direct how the work is done?), financial control (do they have their own business, tools, other clients, and a chance of profit or loss?), and the relationship (is it ongoing, are there benefits, is the work central to your business?).
California uses the stricter ABC test for most work. A worker is presumed to be an employee unless all three are true:
- A: They are free from your control and direction in doing the work.
- B: The work is outside the usual course of your business. (A bakery hiring a web designer passes; a bakery hiring a "contract" baker usually does not.)
- C: They are customarily engaged in an independently established trade or business of the same kind (their own business, other clients, their own marketing).
There are exceptions for some professions and business-to-business arrangements. When in doubt, ask a California employment attorney or your local SBDC.
Red flags that a "contractor" may really be an employee
Misclassification can mean back payroll taxes, penalties, and wage claims. If several red flags apply, talk to a professional before you continue.
Know the true cost
True monthly cost of an employee
Enter your numbers. Payroll tax and insurance percentages vary by state, industry, and payroll size; ask your payroll provider or insurance agent for your rates. The defaults in the hints are only starting points.
Will the hire pay for itself?
Working with a 1099 contractor
Hiring your first W-2 employee
The first employee onboarding checklist walks through the first week.
Notes for your type of business
Shift-based work in your shop is almost always employee work. Plan schedules around your busiest hours, and budget for overtime and break rules.
Helpers who ride along and follow your process are usually employees. Workers' compensation matters most here because injuries happen on the job site. Check your vehicle insurance if employees drive for you.
Packing, shipping, and customer service on a set schedule are usually employee work. Specialist tasks like photography, ads management, or web development are often good contractor projects.
If you bring on someone to deliver the same service you sell (another stylist, tutor, or cleaner), California's ABC test usually makes them an employee. Booth or chair rental arrangements have their own rules; get advice before you set one up.
Your first hire is the biggest step. Many owners start with a virtual assistant or bookkeeper on a contract basis to buy back time, then hire an employee once the role is clear and steady.
Use AI to plan your hire
Act as an experienced small business advisor. Help me decide whether to keep doing a task myself, hire a 1099 contractor, or hire a W-2 employee.
My business: {industry} in {location}. Model: {model}. Channels: {channel}. Team: {size}. In business: {stage}.
Ask me what work I need help with, how many hours a week, whether I'll direct how and when it's done, my monthly revenue and expenses, and my cash on hand.
Then compare the three options in a table (cost, control, risk, paperwork), apply the IRS common-law test and, if I'm in California, the ABC test, and recommend one option with your reasoning. Remind me which points to confirm with an employment attorney or payroll provider.Write a clear, friendly job description for a role at my {industry} business in {location}. Team size: {size}.
Ask me for the job title, the main tasks, the schedule, the pay range, and must-have skills.
Include: a two-sentence intro about the business, responsibilities (5 to 7 bullets), what success looks like after 90 days, requirements, pay and schedule, and how to apply. Use plain language and avoid requirements that aren't truly needed.Help me write a project scope to attach to an independent contractor agreement for my {industry} business.
Ask me what I need done, the deadline, the budget, and how I'll judge the result.
Write the deliverables, timeline, payment schedule, revision limits, and who owns the finished work. Keep the contractor in control of how they do the work. Note that I should have a qualified professional review the final agreement.Frequently asked questions
What is the difference between a W-2 employee and a 1099 contractor?
A W-2 employee works under your direction, and you withhold their taxes, pay employer payroll taxes, and carry workers' compensation. A 1099 contractor runs their own business, controls how the work is done, and pays their own taxes. The label depends on how the work is actually done, not on the contract.
How much does an employee really cost beyond their wage?
Employer payroll taxes, workers' compensation insurance, and any benefits are added on top of wages. Federal FICA alone is 7.65% of wages, and state unemployment, insurance, and benefits add more. Use the worksheet in this toolkit with your own rates.
What is California's ABC test?
It's the test California uses to decide most worker classification questions. A worker is an employee unless they are free from your control, do work outside your usual business, and run an independently established business of the same kind. All three must be true.
What paperwork do I need to hire my first employee?
An EIN, state payroll registration, workers' compensation insurance, Form W-4, Form I-9, a state new-hire report, required labor law posters, and a payroll system. In California, the new-hire report is Form DE 34 and is due within 20 days.
Do I need to send a 1099 to every contractor?
You file Form 1099-NEC for contractors you pay above the IRS reporting threshold in a year, generally by January 31. Collect a Form W-9 before the first payment so you have their tax details, and confirm the current threshold with your tax preparer.
Anything you type into this page is saved only in your browser so you can come back to it. This toolkit is educational. It is not legal, tax, or accounting advice; check decisions with a professional or a free advisor at your local Small Business Development Center.