How to Make Someone a 1099 Employee: W-9, Contract, and 1099-NEC

To hire a 1099 contractor, confirm the working relationship actually qualifies as independent contracting under federal and state tests, collect a signed Form W-9 and a written agreement before any work starts, track what you pay across the year, and file Form 1099-NEC with the IRS and the contractor by January 31 if total payments hit $600 or more. The phrase “1099 employee” is shorthand. There is no such category in tax law: a worker is either an employee who gets a W-2 with taxes withheld, or an independent contractor who gets a 1099-NEC and handles their own taxes.

Calling someone a contractor does not make them one. If the IRS, the Department of Labor, or your state later decides the person was really an employee, you can owe back payroll taxes, penalties, and interest on every dollar you paid. The steps below are ordered the way the work actually happens.

Step 1: Confirm the Worker Qualifies as a Contractor

Three different authorities apply three different tests to the same working relationship. Passing one does not mean passing the others.

The IRS Three-Category Test

The IRS looks at how much control the hiring business has over the worker, grouped into three categories.¹

Behavioral control asks whether the company directs when, where, and how the work gets done. Step-by-step instructions, required hours, and training on your methods all point toward employment. A true contractor decides how to complete the job and delivers a finished result.

Financial control looks at the business side. Contractors typically invest in their own tools, carry their own business expenses, and face real profit-or-loss risk. When you supply everything and pay by the hour, the arrangement looks more like employment.

Type of relationship examines the broader picture: benefits, whether the engagement is for a defined project or open-ended, and how central the work is to your core business. An indefinite arrangement performing work at the heart of what your company does often reads as employment regardless of the contract language.

No single factor decides it. The IRS weighs everything together, and the actual facts of the relationship override anything you put in writing.

The DOL Economic Reality Test

The Department of Labor uses a separate test under the Fair Labor Standards Act to decide whether a worker is economically dependent on your business or genuinely in business for themselves. A 2024 final rule formalized six factors weighed together:²

Opportunity for profit or loss based on managerial skill, not just hours worked
Investment by the worker in tools, equipment, or a business operation
Permanence of the working relationship
Degree of control over scheduling, methods, and supervision
Whether the work is integral to the company’s business
Skill and independent business initiative

This test controls whether the worker is entitled to minimum wage and overtime. A worker can be a contractor for tax purposes and still be an employee for wage-and-hour law.

State Rules Can Be Stricter

More than two dozen states apply some version of the ABC test, which presumes a worker is an employee unless the hiring business proves all three of the following: the worker is free from direction and control, the work falls outside the company’s usual business, and the worker has an independently established trade or business in that field. Fail any one prong and the worker is an employee under state law even if they pass both federal tests. Check your state’s specific rule before you engage anyone; the cost of not doing so shows up as back unemployment insurance premiums and state tax liability.

Step 2: Collect a Signed Form W-9 Before Paying Anything

Before the contractor does any work, or at least before you cut the first check, get a completed IRS Form W-9. The form captures the contractor’s legal name, business name if different, federal tax classification (sole proprietorship, partnership, LLC, or corporation), and taxpayer identification number, which is either a Social Security Number or an Employer Identification Number. The contractor signs it under penalty of perjury.³

If the contractor refuses to provide a valid taxpayer identification number, you are required to withhold 24% of every payment and send it to the IRS as backup withholding. That obligation continues until they give you a valid number.³ Making the W-9 a hard prerequisite before work begins avoids that mess entirely.

Keep the completed W-9 on file. You do not send it to the IRS, but you need the information on it to prepare the 1099-NEC at year-end.

Step 3: Put a Written Agreement in Place

A written contract is not legally required to establish independent contractor status, but working without one is a mistake. The agreement should cover the scope of work, specific deliverables, payment terms and rates, and the timeline. Language stating that the contractor is free to work for other clients and controls their own methods reinforces the independent nature of the relationship. The contract does not override the actual facts if the IRS reclassifies the worker, but it creates a documented framework consistent with your classification.

Keep copies of every W-9, contractor agreement, and filed 1099-NEC for at least three years after the tax return reporting those payments is filed. That covers the standard IRS audit window. If you underreport income by more than 25%, the window stretches to six years.⁴

Step 4: Pay the Contractor and Track the Total

Pay the contractor according to the agreement. You do not withhold income tax, Social Security, or Medicare from their payments. You also do not pay the employer share of payroll taxes, unemployment insurance, or workers’ compensation on their earnings (though state rules on workers’ comp coverage vary).

Track the cumulative amount you pay each contractor across the calendar year. The reporting threshold is $600 per contractor for services performed in the course of your business. Payments to corporations are generally exempt from 1099-NEC reporting, with the main exceptions being payments to attorneys and certain medical and health care payments.⁵

Step 5: File Form 1099-NEC by January 31

For every contractor you paid $600 or more during the calendar year, file Form 1099-NEC. The deadline is January 31 of the following year for both the copy sent to the contractor and the copy filed with the IRS. There is no automatic extension.⁵

If you file ten or more information returns of any type combined across the year (not just 1099-NECs), you must file electronically.⁵ Most businesses hit that combined threshold quickly once W-2s and other returns are counted in.

The IRS is transitioning from the legacy FIRE electronic filing system to the newer Information Returns Intake System (IRIS). The IRS plans to retire FIRE entirely for tax year 2026 returns filed in early 2027, making IRIS the only electronic intake system. Set up an IRIS account in advance rather than during filing season.⁶

Many states require their own copy of the 1099-NEC. Filing electronically through IRIS may let you use the IRS Combined Federal/State Filing program, which forwards 1099 data to participating state tax agencies. The program shares data with states roughly nine times per year, and you may still need to confirm whether your state participates and whether a separate state filing is required.⁷

Penalties for Missing the Deadline

For returns due in 2026, the IRS penalty per return scales with how late you file:⁸

Within 30 days of the deadline: $60 per return
After 30 days but by August 1: $130 per return
After August 1 or not filed at all: $340 per return
Intentional disregard: $680 per return with no annual maximum

The first three tiers have annual caps for small businesses. Intentional disregard has no cap. Penalties apply per return, so a business with 20 unfiled 1099s can face $6,800 in penalties before any other consequences.

What Happens If You Misclassify

If the IRS later determines that someone you paid as a contractor was really an employee, you become liable for the employment taxes you should have withheld and paid. Section 3509 of the Internal Revenue Code sets reduced rates when you filed 1099s and otherwise acted in good faith:⁹

Income tax withholding: 1.5% of wages paid to the misclassified worker
Employee share of FICA: 20% of what the worker’s Social Security and Medicare taxes would have been

If you failed to file the required 1099s at all, both rates double, to 3% and 40%. You also owe 100% of the employer’s matching FICA share regardless of whether you filed returns.⁹

Section 530 Safe Harbor

Section 530 of the Revenue Act of 1978 offers a possible escape from employment tax liability if you meet three requirements: you filed all required 1099s consistently for the worker, you never treated a similar worker as an employee, and you had a reasonable basis for the classification. A reasonable basis can come from a prior IRS audit that raised no issue, a judicial precedent or IRS ruling supporting your position, or a recognized industry practice in your field.¹⁰

The reasonable basis standard is interpreted broadly in favor of the business. The protection disappears if you failed to file 1099s, which is one more reason timely filing is not optional.

When You Genuinely Cannot Tell: Form SS-8

If you cannot determine whether a worker should be a contractor or an employee, either you or the worker can file Form SS-8 to request a formal IRS determination. The form asks detailed questions about behavioral control, financial control, and the nature of the relationship. The process takes at least six months, and you should not delay filing your tax returns while waiting for the answer.¹¹

The IRS will reject the form if it is not properly signed, lacks enough detail, or involves a business-to-business relationship rather than a worker classification question. If the parties are already in litigation with each other, the IRS will also decline to weigh in.

1
Internal Revenue Service. Independent Contractor (Self-Employed) or Employee?
2
Federal Register. Employee or Independent Contractor Classification Under the Fair Labor Standards Act
3
Internal Revenue Service. Instructions for the Requester of Form W-9 (03/2024)
4
Internal Revenue Service. How Long Should I Keep Records
5
Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC (04/2025)
6
Internal Revenue Service. Filing Information Returns Electronically (FIRE)
7
Internal Revenue Service. Combined Federal/State Filing (CFSF) Program State Coordinator Information FAQs
8
Internal Revenue Service. Information Return Penalties
9
Office of the Law Revision Counsel. 26 U.S. Code 3509 – Determination of Employer’s Liability for Certain Employment Taxes
10
Internal Revenue Service. Worker Reclassification – Section 530 Relief
11
Internal Revenue Service. Completing Form SS-8