1099 vs W-2: Contractor or Employee? (2026 Rules)
How to classify workers, what each costs, and the new $2,000 Form 1099-NEC threshold for 2026.
In this article
2026 update: for payments made in 2026, you only have to file Form 1099-NEC for a contractor you paid $2,000 or more during the year, up from $600. The change comes from the One Big Beautiful Bill Act, and the threshold will be adjusted for inflation starting in 2027.
The short answer
A W-2 employee works under your direction. You withhold income tax from their pay, pay half of their Social Security and Medicare taxes, pay unemployment taxes, and send them a Form W-2 each January. A 1099 independent contractor runs their own business. You pay the invoice in full, they handle their own taxes, and if you pay them $2,000 or more in a year (for 2026 payments) you send them a Form 1099-NEC.
| W-2 employee | 1099 contractor | |
|---|---|---|
| Who controls how the work is done | You | The contractor |
| Income tax withholding | You withhold from each paycheck | None; contractor pays estimated taxes |
| Social Security and Medicare | Split: 7.65% employer, 7.65% employee | Contractor pays the full 15.3% self-employment tax |
| Unemployment taxes and workers' comp | Employer pays | Not applicable |
| Benefits and overtime | Often required or expected | None |
| Year-end form | Form W-2 | Form 1099-NEC if paid $2,000+ (2026) |
| Paperwork when you start | Form W-4 and Form I-9 | Form W-9 |
How to tell which one a worker is
You don't get to choose the label. It depends on the actual relationship. The IRS looks at the whole picture using three groups of factors:
- Behavioral control: Do you control what the worker does and how they do it, such as setting their hours, giving detailed instructions or training them in your methods? That points to an employee.
- Financial control: Does the worker invest in their own tools, have their own business expenses, offer services to other clients, and have the chance of profit or loss? That points to a contractor.
- Relationship: Is there a written contract describing a contractor relationship? Are there benefits like insurance or paid leave? Is the work ongoing and central to your business? Benefits and an indefinite, core role point to an employee.
States can apply stricter tests. California, for example, uses the "ABC test" for many types of work, which treats most workers as employees unless the business can prove all three conditions. Check your state's rules before you hire.
If you're genuinely unsure, the IRS will make a determination if you file Form SS-8, though it can take months.
If you hire a contractor
- Get a signed Form W-9 before you pay them. It gives you their legal name and taxpayer ID number.
- Use a written agreement that describes the project, deliverables and payment, not hours and supervision.
- Track what you pay each contractor during the year. Our expense tracker has a Contract labor category for this.
- File Form 1099-NEC for each contractor you paid $2,000 or more in 2026. Send a copy to the contractor and file with the IRS by January 31 (for 2026 payments, the deadline is February 1, 2027, because January 31 falls on a Sunday).
Some payments don't go on a 1099-NEC. Payments to most corporations are generally exempt (legal fees are an exception), and payments you make by credit card or through a payment app are usually reported by the payment company on Form 1099-K instead.
If you are the contractor
Being paid on a 1099 means you're self-employed, and you're responsible for your own taxes:
- Self-employment tax: 15.3% (12.4% Social Security, up to the annual wage cap, plus 2.9% Medicare) on 92.35% of your net self-employment earnings, once those earnings reach $400 in a year.
- Income tax on your profit, at your normal federal and state rates.
- Quarterly estimated taxes. If you expect to owe $1,000 or more for the year, pay estimates around April 15, June 15, September 15 and January 15 to avoid penalties.
The upside: you can deduct ordinary and necessary business expenses, from software and equipment to a portion of a home office. Also note that you owe tax on all your self-employment income whether or not you receive a 1099 for it. The higher $2,000 threshold changes paperwork, not what's taxable.
Freelancing? Make sure your rate covers self-employment tax and the hours you can't bill.
Calculate your rateThe cost of getting it wrong
If you treat an employee as a contractor, you can owe the employment taxes you didn't withhold or pay, plus penalties and interest, and you may face state penalties and claims for unpaid overtime or benefits. If a worker looks like an employee by the tests above, treat them as one, or restructure the work so it genuinely fits a contractor relationship.
Frequently asked questions
What is the 1099 threshold for 2026?
For payments made in 2026, businesses must file Form 1099-NEC for each contractor paid $2,000 or more during the year, up from $600 in 2025. The threshold is set to be indexed for inflation starting in 2027.
When is Form 1099-NEC due?
January 31 of the following year, both to the contractor and to the IRS. For 2026 payments the deadline is February 1, 2027, because January 31, 2027 is a Sunday.
Can someone be both a W-2 employee and a 1099 contractor for the same company?
It's possible when the contractor work is genuinely separate from their job, but it draws scrutiny. If the work is similar to their regular duties, it should usually be paid through payroll.
Is it better to be a 1099 contractor or a W-2 employee?
It depends on your goals. Contractors have more flexibility and can deduct business expenses, but pay the full 15.3% self-employment tax and fund their own benefits. Employees get tax withholding, the employer's share of payroll taxes, and often benefits and legal protections.
This article is general information for US readers, not legal, tax or financial advice. Rules, prices and platform policies change, so confirm details with official sources or a qualified professional.