2. Find another job. This boss is hopeless, you can't fix it.
3. If you want to have fun, quit and tell him that you want to reclassify all the 1099 income as salary. He'll be liable for all kinds of social security stuff, he'll be in deep trouble with the other devs... That would be a major threat to him.
I don't particularly recommend an actual lawsuit, because the money you'd gain from it is so small based on your salary anyway. Also be aware that making such a threat would be extremely disruptive to him, as it would sink his business. So he may resort to more illegal schemes to fight back. Therefore it's probably not worth it - move on!
And please blog about it. Other people in your situation need to know about this. Include specific numbers, it helps!