What is a 1099 employee? The 1099 contractor explained

What changes when a worker is 1099

Take $60,000 paid in 2026. As a W-2 employee, the business withholds income tax and the employee's FICA, and pays its own FICA of $60,000 x 7.65% = $4,590, plus FUTA ($42) and state unemployment tax. As a contractor, the business withholds nothing and pays none of those. The contractor pays self-employment tax, which covers both the employee and the employer halves of Social Security and Medicare, and usually makes estimated tax payments during the year.

Contractors also generally fall outside the overtime, minimum wage, unemployment and workers' comp coverage that comes with being your employee. The full side-by-side is in W-2 vs 1099.

The tests that decide it

• IRS common-law test: behavioral control (do you control how the work is done), financial control (who pays expenses, supplies tools, sets pay) and the type of relationship (contracts, benefits, permanence, whether the work is key to your business). No single factor decides.
• Department of Labor (FLSA): the 2024 economic reality rule is still in the CFR. A rule proposed February 27, 2026 would weigh control and the chance for profit or loss most heavily. It is proposed, not final, as of October 2026.
• States: California, Massachusetts and Illinois (for unemployment insurance) use an ABC test that presumes a worker is an employee unless the business proves all three prongs.

A worker can pass one test and fail another. Either side can ask the IRS to decide on Form SS-8, which the IRS says takes at least six months.

What misclassification costs

If the IRS reclassifies a contractor as an employee, the business can owe the employment taxes it did not pay. Section 530 relief can remove the federal employment tax bill if you filed 1099s on time, treated similar workers the same way, and had a reasonable basis such as industry practice or professional advice. It covers only the federal employment tax classification question and does not make the worker a contractor for other purposes, such as wage and hour law. The worker then owes only the employee share of FICA, filed on Form 8919. More on the risks in employee misclassification.

Paying and reporting contractors

Collect a W-9 before the first payment. File 1099-NEC with the IRS and send the recipient copy by February 1, 2027 for 2026 payments. Contractor payments can run through most payroll tools; see contractor payroll options. For contractors outside the US, see contractor management platforms or a contractor of record if you want the classification risk carried by a provider.