1099 contractor
A 1099 contractor is a self-employed person who performs services for your business and is generally paid without withholding and reported on Form 1099-NEC.
- LAW
- 26 U.S.C. §3121(d)(2), the common-law rules
- THE TESTS
- Behavioral control, financial control, type of relationship
- THRESHOLD
- Form 1099-NEC at $2,000 (2026) or more
- WATCH FOR
- Misclassifying an employee as a 1099 contractor
A 1099 contractor, also called an independent contractor, generally controls how, when, and where the work gets done. You pay the agreed amount for completed work. You withhold no income tax or FICAFICA. FICA is the federal law, and the payroll tax under it, that funds Social Security and Medicare through matching employee and employer shares.Click to open the term unless backup withholdingBackup withholding. Backup withholding is the flat 24 percent a payer must withhold from certain payments, such as Form 1099-NEC nonemployee compensation, when the IRS requires it.Click to open the term applies. The contractor pays self-employment tax instead. You generally owe no FUTAFUTA. FUTA is the federal unemployment tax you pay on the first $7,000 of each employee’s wages a year, with nothing withheld from pay.Click to open the term or benefits; SUTASUTA. SUTA is the state unemployment tax you pay on each employee’s wages up to the state’s wage base, at a rate your state assigns.Click to open the term depends on the state’s test. The label on a contract never settles the status. The IRS, the Department of Labor, and state agencies each test the actual working relationship.
How does a 1099 contractor differ from a W-2 employee?
| 1099 CONTRACTOR | W-2 EMPLOYEE | |
|---|---|---|
| Control | Generally sets their own methods and schedule | You direct how, when, and where they work |
| Withholding | None, unless backup withholding applies | Income tax and FICA from every paycheck |
| Employer taxes | No FICA match or FUTA; SUTA depends on state law | FICA match, FUTA, and SUTA |
| Benefits | None from you | Often health insurance and paid time off |
| Year-end form | Form 1099-NEC | Form W-2 |
Work it out: one year of cost
Enter the W-2 wages and benefits, any state unemployment and workers’ compensation rates, and the contractor’s rate or invoices. The card adds your employer taxes to the W-2 side and finds the hourly rate where the two cost the same.
One year, 2026: a $60,000 W-2 employee or a contractor at $40 an hour
At $2,000 or more (2026), you generally file Form 1099-NEC for payments for services in your trade or business.
Federal employer cost for one year, 2026: a W-2 employee’s wages with your 6.2% Social Security up to $184,500 (2026), 1.45% Medicare, and FUTA at 0.6% of the first $7,000 a year, plus what you enter for state unemployment, workers’ compensation, and benefits, against a contractor’s invoices, with the Form 1099-NEC threshold of $2,000 (2026). It leaves out the classification tests that decide which one the person is, backup withholding, payments that go on Form 1099-K or are exempt from reporting, the contractor’s own self-employment tax, and back pay or overtime a misclassified employee can be owed. Other cases and state law can change the result.
Which tests decide the status?
For federal employment tax, the IRS weighs its common-law rules in three categories; no single fact decides. The Department of Labor asks whether the person is economically dependent on you or in business for themselves. Many states apply a separate, often stricter ABC testABC test. The ABC test is a state law standard: a person you pay for services is your employee unless you prove all three conditions.Click to open the term for wage and unemployment insurance. The same person can come out differently under different laws. If you treat an employee as a contractor without a reasonable basis, you may be liable for their employment taxes.
| CATEGORY | WHAT THE IRS ASKS |
|---|---|
| Behavioral control | Do you control, or have the right to control, what the person does and how? |
| Financial control | Do you control the business side, such as how they are paid, expenses, and tools? |
| Type of relationship | Are there contracts or employee-type benefits? Will it continue, and is the work key to your business? |
What is the economic reality test?
The economic reality test is how courts and the Department of Labor decide whether a person is your employee or an independent contractor under the Fair Labor Standards ActFLSA. The Fair Labor Standards Act (FLSA) is the federal law setting minimum-wage, overtime, recordkeeping, and youth employment standards for covered employment.Click to open the term (FLSA). It asks whether the person is economically dependent on you or in business for themselves. No single factor decides. Factors include control, profit or loss, investment, permanence, and whether the work is integral to your business. The department no longer applies its 2024 rule in investigations; until further action, that rule remains in effect for private FLSA suits.
What do you owe a 1099 contractor?
You file Form 1099-NECForm 1099-NEC. Form 1099-NEC is the IRS information return you file to report nonemployee compensation: payments for services to an independent contractor or other nonemployee.Click to open the term when you pay a contractor $2,000 (2026) or more for services in your trade or business. Payments through 2025 used a $600 threshold. The threshold may be adjusted for inflation from 2027. Payments to corporations are generally exempt, but attorneys’ fees are not. Card and payment-app payments go on Form 1099-K from the payment processor instead.
- 01
Request Form W-9 before the first payment. It gives you the contractor’s legal name, business type, and taxpayer identification number.
- 02
Apply 24% backup withholding when the contractor does not furnish that number, and report the payment even below $2,000 (2026).
- 03
Furnish and file Form 1099-NEC by January 31 of the next year, or the next business day when that date falls on a weekend or legal holiday.
Frequently asked
- Independent contractor (self-employed) or employee?
- Instructions for Forms 1099-MISC and 1099-NEC (12/2026)
- 26 U.S. Code § 3121 - Definitions
- Independent contractor defined
General information, not legal or tax advice. Apply current federal and state rules with qualified guidance.