What This Rule Means
The Worker Classification Rule
A W-2 is issued by employers to employees. Federal income tax, Social Security, and Medicare are withheld from each paycheck — the employer pays half of FICA taxes. A 1099-NEC is issued to independent contractors. No tax is withheld, and the contractor owes both the employee and employer share of self-employment tax.
How It Works
How Classification & Reporting Works
- You receive a 1099-NEC if you were paid $600 or more by a business for services as a non-employee in 2026.
- Worker classification is based on behavioral control, financial control, and type of relationship — not what the payer prefers to call you.
- Self-employed individuals owe 15.3% self-employment tax on net earnings (12.4% Social Security + 2.9% Medicare).
- The Social Security portion applies only to the first of net self-employment income in 2026.
- Self-employed individuals may deduct 50% of self-employment tax from gross income on their return.
2026 Key Figures
Key Figures Side by Side
| Item | W-2 (Employee) | 1099-NEC (Contractor) |
|---|
Example Scenario
Scenario: Contractor vs. Employee Tax Costs
Scenario — Contractor vs Employee Tax Cost
Both Alex (contractor) and Jordan (employee) earn $80,000. Here's what each owes in payroll/self-employment tax:
Alex pays approximately $5,185 more in employment taxes than Jordan on the same gross income — and must make quarterly estimated payments to avoid penalties.
Apply These Rules to Your Numbers
Compare your true net pay as a contractor versus an employee.