Employee or independent contractor? What business owners should know
Calling a worker a contractor does not make it so. Here is how classification works and what it means for payroll and 1099s.
September 28, 2026 · Professional Multiservices
Whether someone who works for you is an employee or an independent contractor affects payroll, taxes, and your paperwork. The label in an agreement is not what decides it. The actual working relationship is.
What the IRS looks at
The IRS looks at three areas: behavioral control, such as whether you direct how the work is done; financial control, such as who provides tools and whether the worker can make a profit or loss; and the type of relationship, such as benefits and whether the work is ongoing.
If they are an employee
You withhold income tax and Social Security and Medicare taxes, pay the employer share, file quarterly Form 941, and give the worker a W-2 at year end. State unemployment and new hire reporting usually apply as well.
If they are a contractor
Collect a Form W-9 before you pay them, and keep it on file. If your payments reach the reporting threshold for the year, you file a 1099-NEC. The current threshold is on the IRS website, and we can confirm it for you.
Why it matters
Treating an employee as a contractor can lead to back taxes, penalties, and interest. If you are unsure about a worker, it is worth reviewing before the next pay period.
We run payroll and prepare 1099s for contractors, restaurants, and other small businesses. Bring us your questions and we will go through them with you.
