Should I Hire an Employee or a Contractor in CT?

W-2 employee vs. 1099 contractor in plain English

The IRS common-law test: behavioral, financial and relationship

For federal employment taxes, the IRS looks at all the evidence of control and independence, grouped into three categories (IRS Topic 762):

• Behavioral control: does the business have the right to direct and control what work is done and how, through instructions, training or other means?
• Financial control: who has unreimbursed expenses, who invests in the tools, whether the worker offers services to the market, how they're paid, and whether they can make a profit or loss.
• Relationship of the parties: written contracts, employee-type benefits, how permanent the relationship is, and whether the work is a key part of your regular business.

Not sure? Either party can ask the IRS for a determination with Form SS-8.

Connecticut's ABC test for unemployment

For CT unemployment tax, a worker is an employee unless all three are true (CT DOL misclassification FAQ):

1. A. The worker is free from your direction and control in performing the service, under the contract and in fact.
2. B. The service is outside the usual course of your business, or performed outside all of your places of business.
3. C. The worker is customarily engaged in an independently established trade, occupation, profession or business of the same nature.

CT DOL notes that factor A fails if you keep the right to control the work, even if you don't use it, and that someone who forms a business only in response to your offer of work won't meet factor C. CT DRS uses the common-law rules, and the Workers' Compensation Commission looks at other factors. For questions, CT DOL's Field Audit Unit is at (860) 263-6360 (Employer's Guide).

What an employee really costs in Connecticut (2026)

On top of wages, the employer pays its share of payroll taxes. Here's an example for one employee earning $50,000:

Sources: Social Security wage base $184,500 for 2026 (IRS); FUTA 6.0% on the first $7,000, 0.6% after the maximum 5.4% credit (IRS Topic 759); CT new employer rate 1.9% and $27,000 taxable wage base for 2026 (CT DOL); CT Paid Leave 0.5% for 2026, deducted from employee pay up to the Social Security limit (CT Paid Leave). The additional 0.9% Medicare tax applies to employee wages over $200,000 and is withheld, not matched.

• Workers' compensation: with few exceptions, all Connecticut employers must carry workers' comp for their employees (CT Workers' Compensation Commission). The cost depends on the job and the insurer.
• Registrations: register with CT DRS for withholding (myconneCT REG-1) and with CT DOL for unemployment before the first payroll.

Hiring a contractor instead: what you still owe the paperwork

• Collect a Form W-9 before you pay.
• File Form 1099-NEC for a contractor you paid $2,000 or more in 2026, generally due Feb 1, 2027, and send CT copies to DRS with Form CT-1096 (IRS 1099 instructions).
• Keep the contract and invoices. Let the contractor set their own hours and methods, use their own tools, and work for other clients.

Misclassification penalties: what's at stake

• Federal: if you treat an employee as a contractor with no reasonable basis, you may be held liable for employment taxes for that worker (IRS). The IRS Voluntary Classification Settlement Program offers partial relief to businesses that reclassify workers going forward.
• Connecticut: you may owe back unemployment tax. Knowingly misrepresenting employees as independent contractors to an insurer can lead to a CT DOL stop work order (CT DOL), and Connecticut law sets a $300 civil penalty for each violation, with each day counted separately (Public Act 23-162).
• For workers: CT DOL lists the losses: no unemployment benefits, no workers' comp if hurt, and no overtime or minimum wage protection.