"1099 or W-2" is really a question about the worker, not the paperwork. Once you know whether someone is your employee or an independent contractor, the forms, the taxes and the payday records follow from it. This post sets the two side by side, explains the IRS test, covers the 2026 change to the 1099-NEC threshold and lists what each kind of worker should get from you.
W-2 and 1099 side by side
| W-2 employee | 1099 independent contractor | |
|---|---|---|
| Federal income tax | Employer withholds it from each paycheck, using the employee's Form W-4 | Not withheld (except backup withholding when no taxpayer ID is given) |
| Social Security and Medicare | Employer withholds 6.2% and 1.45% and pays the same again as the employer share | Contractor pays self-employment tax of 15.3% on net earnings of $400 or more |
| Federal unemployment tax (FUTA) | Employer pays it; nothing comes out of the employee's pay | None |
| Paperwork at the start | Form W-4 and Form I-9 | Form W-9 (name and taxpayer ID) |
| Each payday | A paycheck, usually with a pay stub; many states require one | Payment against the contractor's invoice; no pay stub |
| After the year ends | Form W-2 for all wages paid | Form 1099-NEC if paid $2,000 or more for services in 2026 |
| Minimum wage and overtime (FLSA) | Apply to non-exempt employees | Don't apply to genuine independent contractors |
The money difference is real for both sides. With a W-2 employee the business pays the employer half of Social Security and Medicare (7.65% of wages) plus federal and usually state unemployment tax. A contractor covers both halves through self-employment tax, and can deduct the employer-equivalent half when working out adjusted gross income. That cost gap is exactly why the IRS cares how workers are labelled.
How the IRS decides who is an employee
The IRS uses the common-law rules: a worker is an employee if the business can control what will be done and how it will be done, even if it gives the worker freedom in practice. It groups the evidence into three categories and says no single factor decides the answer; they are weighed together.
| Category | Question it asks | Points toward an employee |
|---|---|---|
| Behavioral control | Does the business control or have the right to control what the worker does and how? | Set hours, instructions on how to do the job, training in the business's methods |
| Financial control | Does the business control the business side of the job? | Hourly pay rather than a price per job, tools and expenses provided, no chance of profit or loss |
| Type of relationship | How do the parties see their relationship? | Benefits such as paid leave or insurance, open-ended work, tasks that are a key part of the business |
A written contract that says "independent contractor" does not settle it on its own. If you still can't tell, you or the worker can file Form SS-8 and the IRS will make a determination; the IRS says this takes at least six months. Wage-and-hour law has its own analysis: the IRS's 2026 overtime FAQs point to the Department of Labor's Fact Sheet 13 for how the FLSA decides who is an employee, separate from the tax test.
The 1099-NEC threshold is $2,000 for 2026
For decades the trigger for Form 1099-NEC was $600. For payments made after 31 December 2025 it is $2,000, and the IRS instructions say it will be adjusted for inflation after 2026. The December 2026 instructions tell payers to file Form 1099-NEC for each person paid at least $2,000 in the course of the business during the year.
- Due dates: give the contractor their copy and file with the IRS by 31 January.
- Get a Form W-9 before the first payment. If a payee doesn't give you a taxpayer ID, backup withholding applies.
- The 2026 form has new boxes for cash tips (1b), the tipped occupation code (1c) and qualified overtime (1d). Most contractor payments won't use them.
- Below $2,000 no 1099-NEC is required for that payee, but the contractor still reports the income on their own return.
What getting it wrong costs
If you treat an employee as a contractor without a reasonable basis, the IRS can hold you liable for the employment taxes you didn't withhold or pay. Relief is possible in limited cases, for example when you filed all the required Forms 1099 for the worker and haven't treated workers in similar jobs as employees. A business that wants to fix past treatment can look at the IRS Voluntary Classification Settlement Program, which reclassifies workers as employees for future periods with partial relief on federal employment taxes.
Workers have a route too. Someone who believes they were an employee but was paid as a contractor can use Form 8919 to report their share of uncollected Social Security and Medicare tax. Separately, the Department of Labor can pursue unpaid minimum wage and overtime if a worker was an employee under the FLSA.
Common small-employer cases
- A shop assistant who works the hours you set, at your till, with your stock: the facts point to an employee and a W-2.
- A web designer with their own business, several clients and a fixed price per project, who chooses how and when to work: the facts point to a contractor and, at $2,000 or more, a 1099-NEC.
- A bookkeeper who invoices you monthly but whom you also direct every day, on your software, with no other clients: the facts are mixed. Weigh all three categories, and use Form SS-8 if you're unsure.
- Paying yourself: owners of an S corporation are paid as employees on a W-2 for their work; sole proprietors and partners are not employees of their own business.
These examples show how the IRS categories apply. They are not a ruling on any real worker; the full facts decide.
What to give each worker, and where PayDocs fits
An employee should get a pay stub each payday showing gross pay, each deduction, net pay and year-to-date totals, then a Form W-2 after the year ends. A contractor gets paid against invoices, and after the year ends gets a Form 1099-NEC if you paid them $2,000 or more. A contractor doesn't get a pay stub, because nothing is withheld; giving one can blur the line you are trying to keep clear.
PayDocs makes each of these documents from your figures: pay stubs for employees, employee copies of Form W-2, and recipient copies of Forms 1099-NEC and 1099-MISC. It doesn't decide how a worker should be classified, file forms with the IRS or the Social Security Administration, or deposit taxes. You file Copy A of each form through the IRS's and SSA's own systems.
Questions
Can I pay someone on a 1099 to avoid payroll taxes?
Only if they really are an independent contractor under the IRS's control test. Labelling an employee as a contractor can leave the business liable for the income tax, Social Security and Medicare it should have withheld and paid.
Does a 1099 contractor get a pay stub?
No. Nothing is withheld from a contractor's payments, so there are no deductions to show. Contractors are paid against their invoices and get a Form 1099-NEC after the year ends if paid $2,000 or more for 2026.
Is the 1099-NEC threshold still $600?
Not for 2026. For payments made after 31 December 2025, the threshold is $2,000, and the IRS says it will be indexed for inflation after 2026. Payments made in 2025 used the $600 threshold.
Who has the final say on classification?
The IRS, applying the common-law rules to the facts. Either the business or the worker can ask for a formal determination with Form SS-8. The Department of Labor applies its own test for minimum wage and overtime.
Sources
- IRS: Independent contractor (self-employed) or employee?
- IRS: Instructions for Forms 1099-MISC and 1099-NEC (Rev. December 2026)
- IRS: Self-employment tax (Social Security and Medicare taxes)
- IRS: Publication 15 (2026), Employer's Tax Guide
- IRS Fact Sheet FS-2026-13: Questions and answers about the deduction for qualified overtime compensation (August 2026)
Sources checked October 4, 2026. This article explains how pay documents work; it is not tax or legal advice.
