The first question isn’t bookkeeping. It’s classification. California’s ABC test under AB5 presumes every worker is an employee unless you can prove all three prongs. The worker is free from your control, performs work outside your usual course of business, and runs an independently established trade. For a cleaning company that hires cleaners, the middle prong is nearly impossible to satisfy. Cleaning is your usual business, so the person cleaning for you is almost certainly a W-2 employee.

Misclassification gets expensive fast. The EDD actively audits service businesses that run 1099 workers doing core work. Penalties include back payroll taxes, workers’ comp premiums, unemployment insurance contributions, and personal liability for owners. Getting this right from day one costs far less than unwinding it later.

For your actual W-2 employees, run everything through payroll software. Hours worked, gross wages, tax withholdings, employer payroll taxes, and workers’ comp all flow through one system that feeds your books. Each pay period posts to wages expense and employer tax expense accounts. This keeps your P&L clean and automates quarterly 941 and DE 9 filings.

For legitimate contractors, meaning someone with their own registered business, their own tools, their own insurance, and multiple clients, collect a signed W-9 before the first payment goes out. Record their payments through accounts payable with a separate vendor profile for each one. At year-end, any contractor paid $600 or more gets a 1099-NEC filed with the IRS and a copy sent to the contractor.

Keep these categories separate in your chart of accounts. Employee wages, employer payroll taxes, and contract labor should be distinct lines. That separation matters for management reporting, for EDD audits, and for spotting when contractor spend is creeping up in a way that probably means you should be hiring employees instead. Our work with cleaning operators consistently shows this classification question is where most owners trip up.

One more piece. California requires workers’ comp coverage for every W-2 employee, with almost no exceptions. If you’ve been treating cleaners as contractors to avoid payroll costs, you’re also likely uninsured against workplace injuries, which is a separate set of problems.

We help cleaning businesses in the San Gabriel Valley set up payroll properly, track contractor payments, and file 1099s at year-end. If you want help sorting through classification and getting your books lined up, bookkeeping services in Pasadena is what we do.