The short answer
The label decides who carries the risk. A W-2 employee is your responsibility: your workers compensation covers their injury and your payroll handles their taxes. A genuine 1099 contractor carries their own. Call an employee a contractor and you get the worst of both, no coverage in place and full responsibility when something goes wrong.
The two labels split one question: who carries the risk
Every job has the same risks attached to it. Somebody could get hurt. Taxes have to be paid. A mistake could damage property or a bystander. Classification does not make any of that go away, it just decides whose problem each piece is.
With a W-2 employee, the risk is yours and the system is built for it. Workers compensation covers the injury, payroll withholds the taxes, and your liability policy generally answers for damage your employee causes while working for you.
With a genuine 1099 contractor, the risk rides with them. They insure themselves, they pay their own taxes, and their mistakes are primarily their liability, not yours.
Why misclassification is worse than either label
Calling an employee a contractor does not move the risk to them. It just means nobody bought the coverage for it. When the risk lands, and an injury or an audit is when it lands, the classification gets decided after the fact, by an agency or a court, based on how the work actually ran.
If they decide the worker was really your employee, you now hold employee sized obligations with none of the protections in place. No workers compensation policy, no withholding history, no unemployment contributions, and the bill for all of it arrives at once, with penalties and interest on top.
What changes when a worker gets hurt
This is where the two labels are furthest apart. An injured W-2 employee goes through your workers compensation, which pays the medical bills and, in exchange, generally takes away their right to sue you. That trade is the whole point of the system.
An injured worker you misclassified has no such deal. They, or their lawyer, can argue they were your employee, which puts you on the hook for the medical bills and the lost wages personally, and in many states hands them back the right to sue you directly, which coverage would have taken off the table.
The guides on workers comp for a one day hire and what happens if someone gets hurt on your property walk through that scenario in detail.
What changes when the damage is to somebody else
Employees also change your exposure to third parties. When your employee drops a beam on the neighbor's fence or backs the truck into a parked car, the claim generally comes to you, because employers answer for what employees do in the course of the work.
A genuine contractor's mistakes are mostly their own liability, which is exactly why you ask a contractor for a certificate of insurance before they start. If the person has no insurance of their own and worked under your direction, expect the claim to find its way to you regardless of what the label said.
The tax side unwinds the same way
Misclassification is also the finding that turns a clean year into an expensive one. Reclassification means the payroll taxes you did not withhold, both halves of Social Security and Medicare, unemployment contributions in most states, and penalties calculated per worker per year.
One reclassified worker tends to become all of them. An audit that finds one misclassified day laborer usually applies the same finding to everybody you paid the same way, going back years.
You do not get to just pick the cheaper label
The classification is decided by how the work runs, not by what the paperwork says. If you set the hours, direct how the job is done, and supply the tools, that looks like employment no matter what anybody signed. The guide on employee or independent contractor walks through the actual test.
Most one day hires run exactly that way, which is why this trips up small employers more than any other rule. Nothing about a job being short makes the worker a contractor.
What to actually do
For a genuine one off, most people collect a W-9, pay, and issue a 1099-NEC if the year reaches the reporting threshold. The W-9, W-2 and 1099 guide covers the mechanics.
If you hire the same people repeatedly, on your schedule, with your tools, price the work as employment: a payroll service and a workers compensation policy. Both cost less than most people expect, and either one is a rounding error next to a single uninsured back injury.
Whichever way you land, ask your insurance agent the one question that matters: if this person is hurt working for me, or hurts somebody else, what does my coverage do?
This guide is general information, not legal, tax, or insurance advice. Rules differ by state and by situation, so talk to your own professional before you rely on it.