Are your regular workers employees or 1099 contractors?

Work it through

You're the contractor. Pick what you'd do, then see how each choice plays out.

1. AListen to the accountant. Reclassify them as W-2 employees, set up payroll withholding, workers comp, and unemployment insurance
   Correct

   Maryland follows IRS guidelines for worker classification. If you control when, where, and how they work, provide tools, and set their schedule — they're employees, not independent contractors. Misclassification violates Maryland labor law, exposes you to back taxes, penalties, and workers comp liability. The MHIC exam tests labor law knowledge — this is one of the 3 labor law questions on the exam.

2. BKeep them as 1099 — it's cheaper and they prefer it too
   Illegal

   Worker preference doesn't determine classification. The IRS behavioral, financial, and relationship tests determine employee vs. contractor status. If you control their work, they're employees. Misclassification penalties include: back payroll taxes + interest, state unemployment fund penalties, workers comp violations, and potential criminal tax fraud. Maryland actively investigates worker misclassification in construction.

3. CHave them form their own LLCs so they're technically businesses, not employees
   Doesn't work

   Creating shell LLCs to disguise an employment relationship is a well-known scheme that the IRS and Maryland Department of Labor see through immediately. 'Economic reality' tests look at the actual working relationship, not the paperwork structure. This actually makes it worse — it shows intentional avoidance rather than honest misunderstanding.