1099-NEC vs. W-2: What Determines Which One a Worker Gets

For this article, Morgan Mikell, Prosper CPAs' Manager of Outsourced Accounting, answered some of the most common questions we hear about whether a worker should get a 1099-NEC or a W-2.

"But We Signed a Contract"

One of the most common things we hear from business owners goes something like this: "It's fine, they signed an independent contractor agreement." It's an understandable belief. If both sides agree in writing that the worker is a contractor, shouldn't that settle it?

Unfortunately, it doesn't. A contract helps document intent, but what matters most is how the relationship works day to day.

The Core Test: Control, Money and the Relationship

Three factors determine whether a worker is an employee or a contractor: behavioral control, financial control and the relationship itself.

Behavioral control: If it walks like a duck…

Our favorite rule of thumb here is simple: if it walks like a duck and quacks like a duck, it's a duck. The more your business controls how, when and where the work gets done, the more likely that worker is a W-2 employee.

Indicators include setting the worker's schedule or requiring them to work specific hours. The same goes for requiring them to follow detailed procedures, or making them get your approval before they make decisions. On the other hand, the more independence the worker has over the way they do the job, the more likely they're a 1099 contractor.

Financial control: Who pays the costs and takes the risk?

Follow the money. If your business pays the worker's expenses and supplies the tools they use, that points toward a W-2 employee. If the worker invests their own money, has a real chance to make or lose money on the work, and serves other clients, that points toward a 1099 contractor.

The relationship: How does the arrangement actually work?

Finally, look at the arrangement itself. Offering benefits, having no set end date and making the work central to what your business does all suggest an employee. A defined project, no benefits and a worker who runs a separate business of their own all suggest a contractor.

What This Looks Like in Real Life

The IRS offers several examples in Publication 15-A that show how these factors play out. Here are four, adapted from that publication, ranging from clear-cut to genuinely tricky.

Clear-cut employee: Donna Lee, car salesperson

Donna works shifts the dealership assigns. The dealer owns the customer lists, her appraisals need a manager's approval, and the dealer pays her health insurance. Even though she earns commission, she's an employee.

Clear-cut contractor: Bill Plum, licensed roofer

Bill signed a flat-fee contract to roof a housing complex. He runs his own business, Plum Roofing, with its own insurance and its own W-2 employees. If the work is faulty, he pays for the repairs. The IRS says he's an independent contractor.

Gray area #1: Milton Manning, tile setter

At first glance, Milton looks like a contractor. He brings his own tools and gets paid by the piece. But the company decides the order of his work and its specifications, supplies all the materials, inspects his work often and carries his workers' comp. He has no business of his own and doesn't look for other clients. The IRS says he's an employee, even with his own tools and per-job pay.

Gray area #2: Tom Spruce, cab driver

Tom uses the cab company's radio, dispatcher and advertising, which might make him look like an employee. But he rents the cab for a flat $150 a day, pays all the costs of running it and keeps all his fares. The IRS says the company's services benefit both of them. He's an independent contractor, even though he relies on the cab company.

The gray-area cases show why no single factor settles the question. Owning your tools didn't make Milton a contractor, and using the company's dispatcher didn't make Tom an employee.

The #1 Mistake We See

The most common misstep is assuming someone is a contractor because they asked to be paid on a 1099, or because they only work part-time. Neither one makes them a contractor. What matters is how the work is controlled, not how the worker asked to be paid or how many hours they work.

New for 2026: A Higher 1099-NEC Threshold

Starting in 2026, you only need to file a 1099-NEC for contractors you pay $2,000 or more in a year, up from $600 (IRS).

It's important to understand what this change does and doesn't do. The threshold decides whether you file the form. It doesn't decide whether the worker is a contractor or an employee.

The One Thing to Remember

If you take away just one idea from this post, make it this: if you control how the work gets done, that person is probably your employee, no matter what the paperwork says.

If you're unsure, call Prosper CPAs at 314.949.1200, before you bring someone on, not just before you send the 1099.