1099 vs W-2: What's the Difference? (2026)

“1099” and “W-2” are the names of two IRS forms, but people use them as shorthand for two kinds of worker. A W-2 worker is an employee. A 1099 worker is an independent contractor. The difference decides who withholds and pays which taxes, whether minimum wage and overtime rules apply, and which forms get filed at year end.

The key point for both sides: you do not get to choose. The IRS, the Department of Labor and your state each apply their own test to the real working relationship. A signed contractor agreement does not make someone a contractor if the facts say otherwise.

This guide covers the tests, the taxes each side pays, the forms, the 2026 changes to Form 1099-NEC, and what misclassification costs. Federal figures are for tax year 2026 and were checked against IRS, Department of Labor and California sources on October 6, 2026.

This is general information, not tax or legal advice. For a specific worker, talk to a CPA, enrolled agent or employment lawyer.

1099 vs W-2 at a glance

	W-2 employee	1099 independent contractor
Who controls the work	The business, including how it is done	The worker, who controls how the result is achieved
Form at hiring	Form W-4 (and Form I-9)	Form W-9
Income tax	Withheld from each paycheck by the business	Paid by the worker, often through quarterly estimated tax
Social Security and Medicare	7.65% withheld from the worker, 7.65% paid by the business	15.3% self-employment tax paid by the worker
Federal unemployment (FUTA)	Paid by the business	None
Minimum wage and overtime (FLSA)	Covered, unless exempt	Not covered
Year-end form	Form W-2	Form 1099-NEC, if paid $2,000 or more in 2026

How worker status is decided

There is no single federal test. Three are common, and a worker can be an employee under one law and not another.

The IRS common-law test

For federal tax, the IRS looks at evidence of control and independence in three categories:

Behavioral control. Does the business control, or have the right to control, what the worker does and how they do the job?
Financial control. Does the business control the business side of the job: how the worker is paid, whether expenses are reimbursed, who provides tools and supplies?
Type of relationship. Is there a written contract or employee-type benefits such as a pension, insurance or vacation pay? Is the relationship expected to continue, and is the work a key part of the business?

No single factor decides it, and there is no set number that makes someone an employee. The IRS asks you to look at the whole relationship, especially the right to direct and control the worker, and to document how you reached your decision. A remote worker is still an employee if you control what is done and how.

The Department of Labor economic reality test

For the federal minimum wage and overtime rules under the Fair Labor Standards Act (FLSA), the DOL asks a different question: is the worker economically dependent on the business for work, or in business for themselves? The DOL says this standard is broader than the IRS common-law test, so someone can be an employee under the FLSA even when control is loose.

Factors the DOL has used include:

the worker’s opportunity for profit or loss through their own managerial skill;
the worker’s investments in their own business;
how permanent the relationship is;
the nature and degree of the business’s control;
whether the work is integral to the business;
the worker’s skill and initiative.

The DOL also says what does not decide status: the job title, being paid on a 1099, or signing an independent contractor agreement.

Where the rule stands in 2026. The six-factor 2024 rule is still in the regulations, but since May 1, 2025 the DOL has told its investigators not to apply it in enforcement and to rely on its longstanding guidance instead. On February 26, 2026 the DOL proposed replacing the 2024 rule with an analysis like its 2021 rule, which would treat control and opportunity for profit or loss as the two core factors. When we checked on October 6, 2026, the DOL’s rulemaking page still listed it as a proposed rule. Check the DOL site for updates before you rely on either version.

State tests, including California’s ABC test

States apply their own tests for state wage laws, unemployment insurance and workers’ compensation, and some are stricter than the federal ones. California’s AB 5, in effect since January 1, 2020, uses the ABC test. A worker is an employee unless the business proves all three:

A. The worker is free from the business’s control and direction in doing the work, both under the contract and in fact.
B. The work is outside the usual course of the business’s work.
C. The worker is customarily engaged in an independently established trade, occupation or business of the same kind.

Part B is the one to think hardest about. California’s examples: a retail store hiring an outside plumber to fix a leak meets it, but a bakery that regularly hires cake decorators for its custom cakes does not. Contracted workers doing the same kind of work as your employees will likely be seen as part of your usual business. Other states have their own tests, so check with your state labor or unemployment agency.

Taxes: who pays what

W-2 employee (2026)

Social Security: 6.2% from the employee and 6.2% from the employer, on wages up to $184,500 in 2026.
Medicare: 1.45% each, on all wages. The employer also withholds 0.9% Additional Medicare Tax on an employee’s wages over $200,000 in the year, with no employer match.
Federal income tax: withheld by the employer based on the employee’s Form W-4.
FUTA: paid only by the employer, 6.0% on the first $7,000 of each employee’s wages, usually 0.6% after the credit for state unemployment tax.
State taxes: income tax withholding where the state has one, and state unemployment tax.

1099 contractor (2026)

Self-employment tax of 15.3%: 12.4% for Social Security and 2.9% for Medicare. It applies when net earnings from self-employment are $400 or more and is figured on Schedule SE. Generally, the amount subject to the tax is 92.35% of net earnings.
The Social Security part applies only up to the annual limit ($184,500 for 2026), counting any W-2 wages first.
Deduction: you can deduct half of your self-employment tax when figuring adjusted gross income.
Income tax: no one withholds it, so you may need to pay quarterly estimated taxes, which can also cover your self-employment tax.
Additional Medicare Tax of 0.9% applies above $200,000 for single filers ($250,000 married filing jointly).

Forms on each side

For an employee: Form W-4 (withholding) and Form I-9 (work eligibility) at hiring, quarterly Form 941, annual Form 940 and a Form W-2 by January 31. See How to Run Payroll Yourself for the full routine.

For a contractor:

Form W-9. Before you pay, ask the contractor for a W-9 with their correct name and taxpayer identification number (TIN). The IRS says to keep it for four years.
Backup withholding. If the contractor does not give you a TIN in the required way, or the IRS tells you the TIN is wrong, you must withhold 24% from reportable payments and report it on Form 945.
Form 1099-NEC. File one for each person you paid at least the threshold for services in the course of your business.

The 1099-NEC threshold changed for 2026

For tax years beginning after 2025, the minimum for reporting nonemployee compensation on Form 1099-NEC rose to $2,000. The IRS says it may be adjusted for inflation starting in 2027. In practice:

Payments made in 2025 (forms filed in early 2026): the old $600 threshold applied.
Payments made in 2026 (forms filed in early 2027): file a 1099-NEC if you paid someone $2,000 or more for services.

Other rules that did not change:

Form 1099-NEC is due to both the IRS and the contractor by January 31. If that falls on a weekend or legal holiday, the due date is the next business day.
Payments to corporations, including LLCs taxed as C or S corporations, are generally not reported. Legal fees paid to attorneys are an exception.
If you file 10 or more information returns in a year (W-2s and 1099s counted together), you must e-file. From the 2027 filing season (tax year 2026 returns), the IRS’s IRIS portal replaces the older FIRE system for e-filing these forms.
If you withheld backup withholding, you must file a 1099-NEC for that person regardless of the amount.

Worked example: $60,000 as W-2 vs 1099 in 2026

The same $60,000 of pay, two ways. This covers federal Social Security and Medicare only, not income tax, state tax or benefits.

As a W-2 employee earning $60,000:

Line	Calculation	Amount
Employee Social Security	6.2% × $60,000	$3,720.00
Employee Medicare	1.45% × $60,000	$870.00
Paid by the worker		$4,590.00
Employer Social Security and Medicare	7.65% × $60,000	$4,590.00
Employer FUTA (with full state credit)	0.6% × $7,000	$42.00
Paid by the business, on top of wages	plus state unemployment tax	$4,632.00

As a 1099 contractor with $60,000 of net profit (after business expenses):

Line	Calculation	Amount
Net earnings subject to SE tax	92.35% × $60,000	$55,410.00
Self-employment tax	15.3% × $55,410	$8,477.73
Deduction for half of SE tax (income tax only)	$8,477.73 ÷ 2	$4,238.87

What it means: as a contractor, the worker pays about $3,888 more in Social Security and Medicare tax ($8,477.73 vs $4,590.00), partly offset by the income tax deduction for half of the SE tax. The business saves its $4,632 of payroll taxes, plus the cost of any benefits. If you are the contractor, price your rate with that gap in mind, along with the benefits and equipment you now pay for yourself.

What misclassification costs

If you treat an employee as a contractor without a reasonable basis, the IRS can hold you liable for the employment taxes for that worker (Internal Revenue Code section 3509). Other consequences:

Wage claims. Under the FLSA, an employee must get at least the federal minimum wage ($7.25 an hour) and overtime at one and a half times the regular rate for hours over 40 in a workweek, unless exempt. A misclassified worker can claim back pay.
State liability. States apply their own tests for state wage laws, unemployment insurance and workers’ compensation, so a state agency may reach its own conclusion and its own assessment.
Workers can raise it. A worker who believes they were misclassified can file Form 8919 to report the employee share of Social Security and Medicare on their pay.

Some relief is available:

Section 530 relief. If you had a reasonable basis for treating a worker as a contractor, filed all required 1099s consistently, and never treated anyone in a substantially similar position as an employee, you may be relieved of the federal employment taxes. It does not make the worker a contractor for other purposes.
Voluntary Classification Settlement Program (VCSP). Eligible businesses can reclassify workers as employees going forward with partial relief from federal employment taxes by filing Form 8952.

When in doubt: Form SS-8

If you still cannot tell, either the business or the worker can file Form SS-8 (Determination of Worker Status). The IRS reviews the facts and makes an official determination. It may take at least six months, so do not wait for it before you start paying someone correctly.

Common mistakes

Relying on the contract. Calling someone a contractor, or having them sign an agreement, does not settle status under the IRS, DOL or state tests.
Using the old $600 rule for 2026 payments. For payments made in 2026, the 1099-NEC threshold is $2,000.
Skipping the W-9. Without a valid TIN you may owe 24% backup withholding you did not take out.
Converting an employee into a contractor doing the same job. If the work and the supervision stay the same, new paperwork does not change the worker’s status.
Contractors forgetting estimated tax. No one withholds for you, and self-employment tax is on top of income tax.
Ignoring state rules. Passing the IRS test does not mean you pass California’s ABC test or your own state’s test.

Next steps

If you are the contractor, the jobs that matter are invoicing, tracking expenses and setting money aside for quarterly taxes. If you are the business, it is running payroll correctly for the people who are employees.

Best Accounting Software for Freelancers for invoicing, expenses and tax-ready books.
Best Payroll Software for 1 Employee if you are paying yourself through an S corporation or making your first hire.
How to Run Payroll Yourself and Best Payroll Software for Small Business for employers.

Frequently asked questions

What is the difference between a 1099 and a W-2 worker?

A W-2 worker is an employee: the business withholds income tax and the employee's Social Security and Medicare taxes from each paycheck, pays a matching employer share, and reports wages on Form W-2. A 1099 worker is an independent contractor in business for themselves: the business pays them in full, may report the payments on Form 1099-NEC, and the contractor pays their own income tax and self-employment tax.

What is the 1099-NEC threshold for 2026?

For payments made in 2026 (tax years beginning after 2025), a business files Form 1099-NEC for each nonemployee it paid at least $2,000 for services in the course of its business. The IRS says the threshold may be adjusted for inflation starting in 2027. Payments made in 2025 used the old $600 threshold.

Is a 1099 contractor or a W-2 employee better?

Neither is better in general; the law decides, not preference. If the business controls how, when and where the work is done, the worker is likely an employee. As a rough guide on taxes, a contractor pays both halves of Social Security and Medicare (15.3% self-employment tax) but can deduct business expenses and half of that tax.

How do I find out if a worker should be a 1099 or a W-2?

Apply the IRS common-law test (behavioral control, financial control and type of relationship), the Department of Labor's economic reality test for minimum wage and overtime, and your state's test, which may be stricter. If it is still unclear, either the business or the worker can file Form SS-8 to get an IRS determination, which may take at least six months.

Sources and updates

Facts in this article were last checked against the official sources below on Oct 6, 2026. Rules and thresholds change, so confirm anything you act on with the official source or a qualified professional. Spot something out of date? Tell us and we will re-check it. How we work: editorial policy.