Purpose

Clarifies whether interns should be classified as W-2 employees, 1099 independent contractors, or unpaid interns for tax and legal purposes, including the legal criteria and consequences of misclassification.

Key Findings

Most PAID Interns Are W-2 Employees

Paid interns should almost certainly be classified as W-2 employees, not 1099 contractors in typical internship situations. Paid interns who are not contracted to complete specific work are taxed like W-2 employees.

Unpaid interns are not W-2 employees if they meet the DOL’s “Primary Beneficiary Test” (see section below). However, most internships at for-profit companies must be paid.

IRS Classification Criteria

The IRS uses a common law test with three main factors to determine worker classification:

  1. Behavioral Control

    • W-2: Employer controls what work is done and how it’s done
    • W-2: Worker receives detailed instructions or training
    • 1099: Contractor has control and autonomy over their work methods

  2. Financial Control

    • W-2: Employer covers expenses (supplies, equipment, travel)
    • W-2: Worker paid hourly or salary
    • 1099: Contractor bears their own costs
    • 1099: Contractor has opportunity for profit/loss

  3. Relationship of the Parties

    • W-2: Indefinite relationship, part of regular business operations
    • W-2: Employer provides benefits (health insurance, paid time off)
    • 1099: Project-based or temporary relationship
    • 1099: No benefits provided

Tax Implications

W-2 Interns:

  • Taxes withheld automatically (federal income tax, Social Security, Medicare)
  • Protected by labor laws (minimum wage, overtime, anti-discrimination)
  • May receive employee benefits
  • Employer pays half of FICA taxes (7.65%)

1099 Interns:

  • Must pay estimated quarterly taxes themselves
  • Pay full 15.3% self-employment tax (Social Security + Medicare)
  • No labor law protections
  • No employee benefits
  • Can deduct business expenses

Misclassification Consequences

Important: Being asked to sign an independent contractor agreement, or being paid via 1099, does NOT legally determine employment status. The IRS and state agencies look at the actual working relationship.

Penalties for employers:

  • Back payment of employment taxes (employer’s share of FICA)
  • State unemployment insurance (SUI) penalties
  • Potential fines and interest
  • California EDD audits have resulted in significant penalties for treating summer interns as contractors

Problems for workers:

  • Unexpected tax liability (paying both employer and employee portions of FICA)
  • No unemployment insurance eligibility
  • No workers’ compensation coverage
  • No minimum wage or overtime protections

What About Unpaid Interns?

Unpaid interns are NOT W-2 employees if they meet specific legal requirements. However, most internships at for-profit companies must be paid.

The Primary Beneficiary Test (FLSA)

The U.S. Department of Labor uses the “Primary Beneficiary Test” to determine if an unpaid internship is legal. The test examines whether the intern or the employer is the primary beneficiary of the relationship.

If the employer benefits more → The intern MUST be paid as a W-2 employee If the intern benefits more → The internship can be unpaid (no W-2)

Seven Factors for Unpaid Internships

The DOL considers these seven non-exhaustive factors (no single factor is determinative):

  1. No Expectation of Compensation

    • Both parties clearly understand there is no expectation of payment
    • Any promise of compensation indicates employee status

  2. Educational Training

    • The internship provides training similar to an educational environment
    • Focus is on learning, not productive work

  3. Tied to Formal Education

    • Integrated with coursework or provides academic credit
    • Part of an official academic program

  4. Academic Calendar Alignment

    • Accommodates the intern’s academic commitments
    • Corresponds to school terms/breaks

  5. Limited Duration

    • Duration limited to the period providing beneficial learning
    • Not an ongoing indefinite relationship

  6. Complements Rather Than Displaces

    • Intern does not displace regular employees
    • Work complements existing staff under close supervision
    • Intern does not perform core business functions

  7. No Entitlement to Job

    • No expectation of paid employment at the end
    • Clear that the internship is temporary and educational

For-Profit vs. Nonprofit Organizations

For-profit companies:

  • Generally CANNOT have volunteers under FLSA
  • Unpaid internships must pass the primary beneficiary test
  • Most interns must be paid as W-2 employees

Nonprofit, educational, charitable, religious, or government organizations:

  • CAN have volunteers who donate time freely
  • Volunteer activities should be civic, charitable, or humanitarian
  • Generally part-time with no pressure or coercion

Important Note

If an unpaid intern fails the primary beneficiary test (meaning the employer is the primary beneficiary), the intern is legally an employee and must be paid minimum wage and overtime. They would then be classified as a W-2 employee with all associated protections.

State and local laws may be stricter: Some jurisdictions use different tests or have additional requirements. Always check federal, state, and local laws.

When Can an Intern Be 1099?

An internship could potentially qualify as 1099 independent contractor work if:

  • The intern is contracted to complete a specific project with defined deliverables
  • The intern has significant control over when and how they complete the work
  • The intern uses their own tools/equipment
  • The intern has their own business and serves multiple clients
  • The relationship is truly independent without day-to-day supervision

However, this is rare for traditional internships where the intern works on-site, follows a schedule, receives training, and integrates into the company’s operations.

How to Determine Classification

If uncertain about classification, businesses can:

  1. File Form SS-8 with the IRS to request an official determination
  2. Consult with a tax professional or employment lawyer
  3. Review IRS Publication 15-A (Employer’s Supplemental Tax Guide)

Default assumption: When in doubt, classify as W-2. Federal and state agencies presume workers are employees unless proven otherwise.

Best Practices

  1. Document the relationship - Keep records of contracts, job descriptions, and supervision methods
  2. Apply tests consistently - Use the same classification criteria for all similar workers
  3. Review periodically - Worker status can change if the relationship changes
  4. Err on the side of W-2 - Misclassification penalties favor treating workers as employees

Sources

  1. Can I classify my intern as a 1099 contractor or must they be a W-2 employee? - College Recruiter
  2. W-2 vs 1099: A Classification Guide for Payers
  3. W-2 Employee or 1099 Independent Contractor? Here’s the Difference | OnPay
  4. W-2 vs. 1099 for Interns: Key Differences - Young Finances
  5. Worker Classification 101: employee or independent contractor | IRS
  6. Independent contractor (self-employed) or employee? | IRS
  7. Topic no. 762, Independent contractor vs. employee | IRS
  8. TerpTax: When Your ‘Internship’ Makes You an Independent Contractor | UMD Smith School

Unpaid Internships and Primary Beneficiary Test

  1. DOL Unpaid Intern Test | ADP
  2. Department of Labor Changes Rules on Unpaid Internships | Pillsbury
  3. Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act | DOL
  4. FLSA permits unpaid internships even if employers benefit, 11th Cir. confirms | HR Dive
  5. DOL Says Hello to Primary Beneficiary Intern Test | Hinshaw
  6. Volunteers and interns | Mass.gov
  7. Interns: Employee or Volunteer | National Council of Nonprofits