Worker classification is the legal determination of whether someone doing work for a company counts as an independent contractor (1099) or an employee (W-2). It affects taxes, benefits, and legal liability, and it isn't the company's choice to make freely.
The classification comes down to factors like how much control the company has over how and when the work gets done, whether the person works for other clients, and whether the role is core to the business, not simply what the contract calls them. Misclassifying an employee as a contractor to dodge payroll tax and benefits is a common early-startup mistake, and it tends to surface expensively in an audit or a diligence review rather than right away.
The direct cost difference is real too: a W-2 hire costs the employer roughly 7.65% more than the stated pay in employer-side payroll tax alone, before benefits. Worth running the actual numbers instead of defaulting to whichever classification looks cheaper upfront.
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