Contractors vs. employees:
W-2, 1099, and your responsibilities.

First, classify the worker

For federal tax purposes, the IRS looks at three areas:

• Behavioral control: Who decides how the work is done, including instructions and training?
• Financial control: Who provides equipment, carries business expenses, and has an opportunity for profit or loss?
• The relationship: Is the arrangement ongoing? Are benefits provided? How does the work fit into the business?

No single answer decides the outcome. An independent designer running a project for several clients presents different facts from an assistant whose daily work you direct. These are illustrations, not automatic classifications. Review the entire arrangement and document your reasoning. Read the IRS tests.

Federal wage-and-hour law and state law can use different tests. A federal tax conclusion does not resolve every employment-law question. For a close call, involve a qualified employment adviser. Department of Labor classification resources.

Your obligations start with contractors

Paying a properly classified contractor generally does not create ordinary employee payroll taxes by itself. It does create a payment and reporting workflow.

1. Collect the tax details early. Request a completed W-9 from a U.S. contractor before payment. Keep it securely; it contains sensitive identifying information. The IRS recommends retaining it for four years. Foreign contractors require a separate documentation and withholding review. IRS contractor onboarding guidance.
2. Keep a clear payment trail. Save the agreement, invoices, payment dates, amounts, and payment methods. Reconcile them to your books throughout the year so January does not become a reconstruction project.
3. Check withholding exceptions. Missing or incorrect taxpayer identification information can trigger 24% backup withholding on reportable payments. If it applies, deposits and Form 945 may be required. Do not assume “contractor” always means “no withholding.” IRS backup withholding guidance and Form 945 requirements.
4. Check the worker’s state. Review state information-return, nonresident withholding, and contractor/new-hire reporting requirements. These are separate from the federal 1099 rules. Confirm the applicable rules with the state agencies before relying on a federal threshold alone. For examples, see California’s contractor reporting and nonresident withholding guidance.

When do you issue a 1099-NEC?

For 2026, the general federal threshold is $2,000 in reportable service payments to a payee during the year. The threshold for 2025 was $600. Future years may have inflation adjustments.

Payments to corporations are generally exempt, with exceptions such as attorney fees. An LLC’s tax classification matters. Payments through credit cards and qualifying third-party networks generally fall under the processor’s 1099-K rules rather than your 1099-NEC; ordinary checks and bank transfers do not automatically receive that treatment.

Generally, provide the contractor’s copy and file with the IRS by January 31 of the following year, moving to the next business day when required. A reporting threshold does not make income below it tax-free. IRS 1099-MISC and 1099-NEC instructions.

If you file 10 or more covered information returns in total, electronic filing is generally required. Count across return types, including W-2s—not just your contractor forms. IRS reporting and e-filing rules.

What changes with your first employee?

Employee payroll adds recurring responsibilities. Before the first payday, confirm your EIN, applicable state withholding and unemployment accounts, work locations, and payroll setup.

• Onboard the employee: collect withholding forms, complete employment-eligibility verification, and handle required new-hire reporting.
• Review employment requirements: check applicable wage and overtime rules, pay frequency, workers’ compensation, leave, and required notices.
• Run each payroll: calculate gross pay, deductions, tax withholding, employer taxes, and net pay. Maintain accurate wage and time records.
• Fund taxes as well as wages: employer taxes are an additional business cost. Withheld employee taxes must also reach the appropriate agencies.

Requirements depend on where the employee works and your circumstances. Start with IRS hiring guidance, USCIS I-9 guidance, and your state agencies.

Paydays, deposits, and returns are different deadlines

Paying an employee does not finish the payroll cycle. Federal deposits generally follow a monthly or semiweekly schedule, with special rules that may accelerate payment. That schedule is separate from the return-filing deadline.

• Form 941: generally filed quarterly for federal withholding and Social Security and Medicare taxes. Use Form 944 instead only when the IRS authorizes it.
• Form 940: reports federal unemployment tax when applicable; deposits may be required during the year.
• Form W-2: provided to employees and filed with the Social Security Administration, generally by January 31 after year-end, subject to weekend and holiday rules.
• State filings: follow each applicable agency’s reporting and payment schedule.

Keep a calendar for deposits, returns, and year-end forms. IRS deposit and reporting guidance.