Independent contractor

Why it matters

The label decides who pays what. For an employee, you withhold income tax, pay your share of Social Security and Medicare, and usually carry workers' compensation. An independent contractor handles their own taxes and insurance. Calling someone a contractor when the facts say employee doesn't move those costs off you; it can come back as back taxes, interest and penalties.

How the IRS decides

For federal employment taxes, the IRS applies common-law rules and looks at the whole relationship. The evidence falls into three groups ¹:

• Behavioral control: does your business have the right to direct what work gets done and how, through instructions, training or other means?
• Financial control: who covers expenses and makes the investment in tools and equipment, can the worker offer their services to others, how are they paid, and can they make or lose money on the work?
• Relationship of the parties: written agreements, benefits, whether the arrangement is ongoing, and whether the work is a key part of your regular business.

The IRS says to weigh all the evidence of control and independence ². A signed contractor agreement is one piece of that evidence, not the answer, so how the work actually happens matters.

Example: An HVAC owner pays two people by the job. The first runs his own licensed duct cleaning company, sets his price, brings his own truck and equipment, carries his own insurance and works for several contractors. The second rides in the owner's van, uses the owner's tools, follows the owner's schedule and works only for this business. The first looks like an independent contractor. The second looks like an employee, whatever form he receives at year end. The people are made up for illustration.

What the 1099-NEC does and doesn't do

If you pay a non-employee $2,000 or more for services in a calendar year, payments made after December 31, 2025 are generally reported on Form 1099-NEC ³. For earlier years the threshold was $600 ³. Collect a W-9 before the first payment so you have the name and taxpayer ID.

The form reports payments. It doesn't make anyone a contractor. If the relationship fails the common-law test, a stack of 1099s won't help.

When you're not sure

• Ask the IRS. Either the business or the worker can file Form SS-8 to get an official determination for federal employment tax purposes ¹. Expect it to take months.
• Check your state. States apply their own tests for unemployment insurance, workers' comp and wage laws, and they can be stricter than the IRS's. Ask your state labor or workforce agency, or an employment lawyer.
• Ask a CPA before you build a crew model on subs. It's cheaper to set it up right than to fix it after an audit or an injury.

Common mistakes

• Using "sub" for helpers. A helper who works your schedule, in your van, with your tools, on your customers, is usually an employee.
• Not checking real subs' insurance. Collect certificates for general liability and workers' comp before a sub starts, and ask your agent how uninsured subs are treated when your policy is audited.
• Pricing labor as if contractors are cheaper. If the arrangement doesn't hold up, the payroll costs were always yours. Build the real cost into your labor rate.

How it connects

On your own side of the arrangement, if you're the one working as a sub, your income goes on Schedule C and you pay self-employment tax on it. Many subs get an EIN so they don't have to give their Social Security number on every W-9.