W-2 vs 1099: employee or independent contractor?

A W-2 reports an employee's wages and the taxes the employer withheld from them. A 1099-NEC reports money paid to someone who is not an employee, usually with no tax withheld at all. Which form a worker gets depends on the working relationship, not on a job title, a contract label or what either side would prefer. Get it wrong and the business can end up owing the taxes it should have withheld.

W-2 and 1099 side by side

How the IRS decides: who controls the work

For federal tax purposes the IRS applies the common-law rules. The question is how much control the business has, or has the right to have, over the worker. The evidence falls into three groups:

• Behavioral control. Does the business direct what work gets done and how it is done, through instructions, training or other means? The right to control the details counts even if the business doesn't use it.
• Financial control. Who controls the business side of the job? Look at unreimbursed expenses, who pays for the tools and facilities, whether the worker offers their services to other clients, how they are paid (by the hour or by the job) and whether they can make a profit or take a loss.
• Type of relationship. Is there a written contract? Does the worker get employee-type benefits such as insurance, a pension plan, vacation pay or sick pay? Is the relationship expected to continue, and is the work a key part of the company's regular business?

No single factor decides it, and there is no magic number of factors. Some facts may point one way and others the opposite way, so the whole relationship has to be weighed. Working from home doesn't change the answer: a remote worker is still an employee if the business can control what is done and how.

There is one in-between group. Statutory employees, such as certain delivery drivers, full-time life insurance agents, home workers and traveling salespeople, get a W-2 with the statutory employee box in box 13 checked. Their pay has Social Security and Medicare tax withheld but no federal income tax.

What each form reports

A W-2 shows taxable wages, tips and other pay in box 1, federal income tax withheld in box 2, Social Security and Medicare wages and tax in boxes 3 to 6, coded items such as 401(k) deferrals in box 12, and state and local wages and tax at the bottom. The employee needs it to file their return.

A 1099-NEC shows the total nonemployee compensation paid during the year: fees, commissions, and prizes and awards for services. For payments made in 2026 a business files one for each contractor it paid $2,000 or more in the course of its trade or business (the threshold was $600 for payments through 2025). Before the first payment, the business usually asks the contractor for a W-9; see how to fill out a W-9.

How the taxes differ

Employees have federal income tax withheld based on their W-4. The employer also withholds 6.2% Social Security tax on wages up to $184,500 (the 2026 wage base) and 1.45% Medicare tax on all wages, plus 0.9% Additional Medicare Tax on wages over $200,000. The employer pays a matching 6.2% and 1.45% on top, and federal unemployment tax. Our FICA tax guide walks through the math.

Contractors have nothing withheld. They pay self-employment tax of 15.3% (12.4% for Social Security and 2.9% for Medicare) when their net earnings from self-employment are $400 or more. For 2026 the Social Security part stops once combined wages and net earnings reach $184,500. Contractors can deduct the employer-equivalent half of the tax when figuring adjusted gross income, and business expenses reduce the net earnings the tax is figured on.

Because no one withholds for them, contractors generally have to make estimated tax payments on Form 1040-ES if they expect to owe $1,000 or more when they file. The year has four payment periods, and paying too little or too late can bring a penalty even if a refund is due at the end.

1099-NEC or 1099-MISC?

Both report payments to people who aren't employees, but for different things. Use the 1099-NEC for pay for services: contractor fees, commissions and attorneys' fees. Use the 1099-MISC for rents, royalties, prizes and awards that aren't for services, medical and health care payments, crop insurance proceeds and gross proceeds paid to an attorney. Payments made by credit card or through a payment network are reported by the payment company on Form 1099-K instead. More detail: 1099-MISC or 1099-NEC.

The cost of getting it wrong

A business that treats an employee as a contractor with no reasonable basis can be held liable for the employment taxes on that worker's pay. Relief may be available if the business had a reasonable basis, filed all the required 1099s consistently and hasn't treated anyone in a substantially similar job as an employee. A business that wants to fix the problem going forward can apply for the Voluntary Classification Settlement Program on Form 8952, which offers partial relief.

Workers who believe they were wrongly treated as contractors can use Form 8919 to figure and report the employee share of the uncollected Social Security and Medicare tax. If the status is unclear, either side can file Form SS-8 and ask the IRS to decide; the IRS says a determination can take at least six months. See the IRS pages on employee or independent contractor and Form SS-8.

This guide covers federal tax classification. State agencies and labor laws can apply their own tests, so check the rules where the work is done too.

Making the form

Once you know which side of the line a worker is on, the paperwork is simple. Paystub.biz fills the official IRS forms: make a W-2 for an employee or make a 1099-NEC for a contractor. Both are due to the worker by February 1, 2027 for 2026 pay; the W-2 and 1099 deadlines guide has every date. For the IRS rate details, see the IRS page on self-employment tax.