Should ITIN Workers Be 1099 or W-2?

If you hire workers with ITINs (Individual Taxpayer Identification Numbers), one question comes up constantly:

Should they be paid as 1099 contractors or W-2 employees?

This isn't just a paperwork decision. It's a major compliance issue.

Let's break this down.

First: ITIN vs. Worker Classification Are Two Different Things

An ITIN is a tax identification number issued by the IRS. Nothing more.

It is not a worker classification.

You can have:

A W-2 employee with a Social Security Number
A W-2 employee with an ITIN
A legitimate independent contractor with an ITIN

The number itself does not determine 1099 or W-2 status.

The working relationship does.

The Real Question: Are They Truly Independent?

The Department of Labor and IRS look at control and economic dependence — not what you call the worker.

If you:

Set their schedule
Provide tools and materials
Supervise their work
Require them to follow your process
Pay them hourly or daily
Prevent them from working for others

They are very likely a W-2 employee.

Calling them a 1099 contractor does not make it true.

Why This Becomes a Problem With ITIN Workers

Here's what we see constantly:

A payroll company refuses to process ITIN workers as W-2 employees. The business owner is told, "Just pay them 1099."

That advice creates real exposure.

Many business owners think:

"They don't have a Social Security number, so they must be 1099"
"Everyone else in my industry does it"
"It's easier"
"My accountant said it's fine"

But just because it's easier doesn't mean it's right.

What's Actually at Stake

When a worker is misclassified, agencies assume wages were handled incorrectly.

That triggers:

Unpaid overtime claims
Back payroll taxes
Workers' compensation issues
State unemployment claims
Spread-of-hours violations (in certain states)
Penalties and interest

And it often starts with one complaint.

The DOL does not care whether your payroll company refused to add ITIN workers correctly. They look at the employer.

Construction Industry Red Flags

Construction is one of the most audited industries for misclassification.

Common red flags:

High use of daily or cash rates
Crews paid the same amount regardless of hours worked
Subcontractors who only work for one company
Workers using company vehicles and equipment
Long-term "independent contractors"
Job site supervision and strict direction

Those are classic employee indicators.

The Department of Labor has repeatedly identified construction as a priority enforcement area. If your workers look and function like employees, labeling them 1099 will not hold up.

Real Penalties

This is not theoretical.

Misclassification cases result in:

Tens of thousands in back wages
Six-figure payroll tax assessments
State labor department investigations
Personal liability for owners in some states
Debarment from public works projects
Workers' comp coverage denial

Once an audit starts, agencies often expand their review to multiple years.

The "Everyone Does It" Myth

Many contractors assume 1099 is standard practice for ITIN workers.

It's not.

What's common in the industry is not the same as what is compliant.

Large payroll companies often refuse to process ITIN workers as W-2 employees because it requires additional administrative work. So employers get pushed toward 1099 — not because it's correct, but because it's easier for the payroll provider.

That's a dangerous shortcut.

The Right Way to Handle ITIN Workers

If the worker functions as an employee, they should be a W-2 employee.

That means:

Proper withholding
Accurate time tracking
Overtime calculation
Workers' compensation coverage
State unemployment reporting
Real W-2s issued with the correct ITIN

Yes, it requires a payroll provider that understands the process. Yes, it requires structured documentation.

But it dramatically reduces your exposure.

Why This Matters More Now

Wage and hour enforcement has increased in construction and service industries. Agencies share data across departments.

One worker filing for unemployment can open a door
One disgruntled worker can trigger an investigation
One public project audit can uncover years of misclassification

This is not about fear. It's about protecting your business.

Bottom Line

ITIN does not equal 1099.

Classification is based on:

Control
Supervision
Economic dependence
How the work is actually performed

If you're unsure whether your workers are classified correctly, you're not alone. We review situations like this every week.

Getting it right now is far less expensive than defending it later.

Want to know what compliant payroll support looks like — including adding ITIN workers properly as W-2 employees?

Use our instant price calculator to see what it costs to work with Baron Payroll. It may be simpler than you think — and far safer than staying where you are.