Your business runs on labor, and paying crews as contractors looks cheaper on paper. You skip payroll taxes, workers' comp and withholding, and you file a 1099-NEC in January. The trouble is that the form doesn't decide whether someone is a contractor. How the work actually gets done decides it, and in many cleaning companies that looks like employment. If you pick the accounts, set the schedule, hand over the checklist and supply the chemicals, and the cleaner works only for you, an IRS, state unemployment or workers' comp audit can reach the same conclusion. The bill then covers every year the label was wrong.

How the test works for cleaners

For federal employment taxes, the IRS asks whether you have the right to control how the work is done, not just the result. It looks at three kinds of evidence:

- Behavioral control: Who decides which buildings, which hours, which tasks in what order, and to what standard? A required checklist, a uniform, training and a supervisor who inspects the work all point toward employment.
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- Financial control: Who supplies the chemicals, equipment and vehicle? Can the worker make or lose money on a job, or is the pay hourly or per shift no matter what? Does the worker bill other customers?
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- Relationship: Is there a written contract, are there benefits, and is the work ongoing and part of your core business? Cleaning is the core business of a cleaning company.

No single factor settles it. But a cleaner who works set shifts at your accounts, with your supplies and your checklist, for nobody else, is hard to defend as a contractor.

State law is often stricter. Several states use an "ABC" test for unemployment or wage law, which presumes a worker is an employee unless you prove, among other things, that the work is outside your usual business. A cleaning company that pays people to clean generally can't meet that part. Your preparer checks your state's tests.

Either side can ask the IRS for a ruling on Form SS-8, but it's slow and usually follows the facts above. You're generally better off fixing the facts or the classification.

What reclassification costs

If the IRS reclassifies your workers after an audit, you generally owe the employer's share of Social Security and Medicare, plus a reduced amount for the employee's share and the income tax that should have been withheld. If the mistake wasn't intentional, IRC §3509(a) sets that at 1.5% of wages for withholding and 20% of the employee's FICA. If you didn't file the required 1099s, §3509(b) doubles those to 3% and 40%. Interest and penalties come on top. §3509's reduced rates don't apply to FUTA, so federal unemployment tax is owed in full on reclassified wages, and state unemployment tax is a separate bill.

Example: you pay six cleaners $30,000 each as contractors, $180,000 in all, and file the 1099s. Reclassified for one year under §3509(a), the federal employment tax comes to about $13,770 of employer FICA (7.65%), $2,754 for the employee's FICA share (20% of 7.65%) and $2,700 of withholding (1.5%). That's about $19,200 for the year, before interest, penalties, FUTA, state unemployment and workers' comp. Three open years triples it.

Overtime is a separate exposure. A misclassified cleaner who worked more than 40 hours in a week may be owed overtime under federal and state law, with no tax return involved at all.

Section 530 relief

If you've treated a group of workers as contractors, Section 530 of the Revenue Act of 1978 may protect you from federal employment tax on them, but only if all three of these hold:

- You filed every required 1099 for those workers.
- You never treated anyone in a substantially similar job as an employee. If you have W-2 cleaners and 1099 cleaners doing the same work, you fail this test.
- You had a reasonable basis, such as a court case or IRS ruling, a prior IRS audit, or a long-standing practice of a significant segment of your industry. A 25% safe harbor applies to the industry test under the 1996 amendments.

However, Section 530 is a defense, but it's not a plan. It doesn't cover state agencies or overtime claims, and it fails the day you hire one W-2 cleaner into the same role.

The fix: reclassify going forward

The IRS Voluntary Classification Settlement Program lets you start treating a group of workers as employees and settle the past for a small amount.

1. Check that you qualify: You must have treated the workers consistently as contractors and filed every required 1099 for the past three years. You can't be under an IRS employment tax audit, or a Department of Labor or state classification audit of those workers. If the IRS or DOL audited the classification before, you must have complied with the result and must not be contesting it in court.
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2. File Form 8952 at least 120 days before the date you want to start treating them as employees. You sign it yourself, not your representative.
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3. Pay 10% of one year's employment tax on those workers' pay for the most recent tax year, figured at the reduced §3509(a) rates. In the example above, that's about $1,900 instead of about $19,200 for each open year, with no interest or penalties.
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4. Sign the closing agreement: The IRS agrees not to audit those workers' classification for prior years.

The tradeoff is that from then on you carry payroll tax, withholding, unemployment tax, workers' comp and payroll processing for those workers, and you have to price that into your contracts. The program doesn't settle anything with your state, and your preparer checks your state's options.

If the facts really do support contractor status, the other path is to make the paperwork match how the work is done. That means a written agreement, the worker's own supplies and insurance, the right to turn down jobs and work for others, pay by the job instead of the hour, and invoices from the worker's own business. Changing the paperwork without changing how the work is done doesn't help.

Two smaller leaks

- Supplies: Chemicals, liners, paper goods and small tools costing $200 or less are materials and supplies under Reg. §1.162-3. Supplies you track as inventory on hand are deducted as you use them. Incidental supplies with no inventory records are deducted when you buy them. Without an applicable financial statement, you can also elect the de minimis safe harbor to expense items up to $2,500 per invoice or item (Reg. §1.263(a)-1(f)). A December bulk buy isn't automatically a 2026 deduction, because a stockpile tracked as inventory on hand is non-incidental and is deducted as it's used.
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- Prepaid contracts: If a building owner prepays a year of cleaning in November and you're on the cash method, it's income when you receive it. On accrual, you may be able to defer the unearned part to the next tax year under §451(c) and Reg. §1.451-8.

What to do

1. List everyone you paid on a 1099 in 2026. Note their hours, accounts, who supplies what and whether they work for anyone else. It costs nothing and shows where your exposure is.
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2. Confirm you filed every required 1099 for 2023, 2024 and 2025. Missing forms raise the §3509 rates and can disqualify you from both the settlement program and Section 530. For payments made in 2026, the 1099-NEC threshold rises to $2,000.
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3. Check for mixed treatment. One W-2 cleaner doing the same work as five 1099 cleaners undercuts the Section 530 defense for all of them.
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4. Start tracking supplies on hand at year-end instead of expensing every purchase.
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5. Price the payroll cost. Compare wages plus employer taxes and workers' comp against your current contract margins before you decide.
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6. Decide whether to reclassify or fix the facts. The window for a January 1st, 2027 switch closed in early September 2026, since Form 8952 has to go in 120 days ahead. If you file now, a spring 2027 date is still realistic.

Worker classification is a major tax risk for cleaning companies, and it costs more every year it sits. If your crews are on 1099s, or you have W-2 and 1099 cleaners doing the same work, book a 30-minute Tax Leak Review before year-end: https://cal.com/mister-moneysleeves/tax-leak-review​

Tristan D. Taylor, EA

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