Paying someone on a 1099 feels simpler. No payroll withholding, no unemployment contributions, one form at the end of the year.
That’s why it’s tempting. But in New Jersey, getting it wrong is expensive, and the state’s test for who counts as an employee can be tougher to pass than the federal one.
The short version: New Jersey starts by assuming every worker is an employee. To treat someone as an independent contractor, the business has to prove all three parts of the state’s ABC test.
Fail any one part and that worker is an employee for state purposes, which means back contributions, penalties paid directly to the worker, and possibly personal liability for owners and managers. The IRS runs its own separate test on top of that.
1099 vs W-2 at a glance
1099 vs W-2 Worker Classification
| W-2 employee | 1099 contractor | |
| Who withholds income tax | The business | Nobody, the worker pays their own |
| Social Security and Medicare | Split between business and worker | Worker pays self-employment tax |
| NJ unemployment and disability | Covered through payroll | Not covered |
| Year-end form | W-2 | 1099-NEC, if paid $2,000 or more |
| Who controls the work | The business | The worker |
| Burden of proof in NJ | Presumed status | Business must prove all 3 ABC prongs |
What is New Jersey’s ABC test?
It’s the test New Jersey uses to decide whether a worker is an employee, written into the state’s unemployment law. To call someone an independent contractor, the business has to show all three of these:
- A, control. The worker is free from your control or direction over how the work gets done, both in the contract and in practice.
- B, your business. The work is outside the usual course of your business, or it’s done outside all of your places of business.
- C, their business. The worker is customarily engaged in an independently established trade, occupation, profession or business.
That word “all” is the whole ballgame. The New Jersey Department of Labor’s own guidance says the business carries the burden of proof, and failing any single prong makes the worker an employee.
Think hard about prong B. A plumbing company paying a plumber on a 1099, a salon paying a stylist, a lawn care company paying a crew member. That work is the business itself, so it’s very hard to call it “outside the usual course.”
What changed in 2026?
New Jersey made the ABC test more detailed. The state Department of Labor adopted final regulations on the test on May 5, 2026, and they took effect October 1, 2026, according to a summary by the law firm Morgan Lewis.
A few points from those rules matter for small businesses. Having a contractor sign a contract you wrote, that they can’t negotiate and that you can change or end, carries less weight. A worker having a license, an LLC, insurance, other clients or a 1099 isn’t enough by itself to pass prong C. The state looks at how established and lasting the worker’s own business really is. And for remote workers, a person’s home doesn’t count as one of your places of business under prong B.
What are the penalties for misclassifying workers in New Jersey?
They add up. Under laws New Jersey passed in January 2020, as summarized by the employment law firm Jackson Lewis, the state can:
- Order the business to pay the worker up to 5% of their gross earnings over the past 12 months
- Charge an administrative penalty of up to $250 per misclassified worker for a first violation, and up to $1,000 per worker after that
- Issue a stop-work order after an audit or investigation, with at least seven days’ notice
- Hold an owner, director, officer or manager personally liable for certain wage and tax violations
Employers also have to post a notice about misclassification where workers can see it.
All of that comes on top of the payroll contributions that should have been paid in the first place.
How does the IRS decide 1099 vs W-2?
Differently. The IRS uses common-law rules that look at three areas:
First, who calls the shots on the work? If you decide how it gets done, or even just have the right to, that leans toward employee. The IRS calls this behavioral control.
Then the money. Who buys the tools? Do you cover their expenses? Are they paid by the hour like staff, or by the job like a vendor? That’s financial control.
Last is the relationship itself. A written contract helps, but benefits like paid time off point the other way. So does work that’s open-ended, or that sits at the heart of what your business does.
So a worker can come out one way federally and another way in New Jersey. You have to pass both.
If a business treats an employee as a contractor without a reasonable basis, the IRS says it can be liable for the employment taxes on that worker. Not sure where someone falls? Either side can file Form SS-8 to ask the IRS for an official determination, though the IRS warns it can take six months or more. And businesses that want to fix things going forward can look at the Voluntary Classification Settlement Program, which offers partial relief on federal employment taxes for reclassifying workers as employees.
What’s the 1099 threshold now?
It used to be $600. Not anymore. Starting with payments made in 2026, you don’t have to send a 1099-NEC or 1099-MISC until you’ve paid someone $2,000 in the year. And from 2027 on, that number gets bumped up for inflation each year.
Keep in mind a 1099 is just a reporting form. Filing one doesn’t make someone a contractor. Under New Jersey’s new rules, it’s specifically called out as not enough on its own.
How do you lower your risk?
Start with a list. Everyone you paid outside of payroll last year, what they did, how long they’ve worked with you, and whether they have other clients. Then run each one through all three ABC prongs, plus the IRS factors. Be honest about prong B.
Keep the paperwork, too: contracts, invoices from the worker’s own business, proof of their insurance. Our post on How Long Should NJ Businesses Keep Tax, Payroll, and Accounting Records? covers how long to hold on to them. Worker classification also shows up on the list in IRS Audit Red Flags: What Triggers Tax Audits for NJ Businesses.
One last thing. Every business is a little different, and this is a broad overview, not legal advice. Before you change how anyone gets paid, sit down with your accountant, and bring in an employment lawyer if the answer isn’t clear.
Frequently asked questions
What is the ABC test in New Jersey?
It’s the state’s test for employee status. A business must prove a worker is free from its control, does work outside its usual business or places of business, and runs an independently established business.
Does a 1099 make someone an independent contractor?
No. A 1099 is a reporting form. New Jersey’s rules say it isn’t enough on its own.
What is the penalty for misclassifying an employee in NJ?
Up to 5% of the worker’s gross earnings over 12 months paid to the worker, plus administrative penalties of up to $250 or $1,000 per worker.
What is the 1099 threshold for 2026?
$2,000 for payments made after December 31, 2025.
Not sure your contractors would pass New Jersey’s test? Sincoff & Sincoff works with small businesses in Middlesex, Burlington and Ocean County. Call our Monroe Township office at 908-489-1579 or our Edgewater Park office at 848-222-1608. See our Business Consulting, Business Bookkeeping and IRS Representation services, or request a free consultation.
