Information current as of October 13, 2026. Rules change, so verify with the linked IRS and DOL sources.
The paperwork for a first hire depends on one early choice: is this person an employee (Form W-2) or an independent contractor (Form 1099-NEC)? For payments made after December 31, 2025, the Form 1099-NEC filing threshold is $2,000 (previously $600).
Why classification matters
For an employee, the business withholds income tax, pays part of Social Security and Medicare, and reports wages on Form W-2. For a contractor, the business generally does not withhold (except backup withholding, below), collects a Form W-9, and reports payments on Form 1099-NEC if they reach the threshold. See the IRS overview of employee vs. independent contractor.
How the IRS looks at it
The IRS weighs three categories of facts together. No single fact decides the outcome (IRS).
- Behavioral control: does the business direct what the worker does and how?
- Financial control: who controls the business side, such as pay, expense reimbursement and tools?
- Type of relationship: contracts, benefits, whether it is ongoing, and whether the work is key to the business.
How the Department of Labor looks at it (status on October 13, 2026)
The DOL uses an "economic reality" test under the Fair Labor Standards Act (FLSA). As of October 13, 2026, the DOL rulemaking page shows a proposed rule, not a final one, issued February 26, 2026, with comments closed April 28, 2026. The proposal names two core factors: the worker's control over the work, and opportunity for profit or loss based on initiative and/or investment. It also lists other factors (skill, permanence of the relationship, and whether the work is an integrated unit of production), and says more factors may be considered. The page says the DOL no longer applies the 2024 rule in investigations, citing Field Assistance Bulletin 2025-1. Note that the general DOL misclassification page still describes the 2024 rule, so read it with that in mind. Recheck for a final rule.
State tests can be stricter. Ask your state labor agency; see the DOL directory of state labor offices.
If you hire an employee
- Get an EIN from the IRS if you do not have one.
- Have the employee sign Form W-4 by the first wage payment. Without one, you withhold as if the employee is single (IRS: Hiring employees).
- Complete Form I-9 for every new hire to verify identity and work authorization. Read the USCIS I-9 page.
- Report the new hire to your state. Federal law sets an outer limit of 20 days, and states may set shorter ones (42 U.S.C. 653a). Start at the federal child support employer page, which links to state reporting sites.
- Understand payroll taxes. For 2026, Social Security is 6.2% each for employer and employee on wages up to $184,500, and Medicare is 1.45% each with no wage limit. Employers also withhold an extra 0.9% Additional Medicare Tax from wages over $200,000 (IRS Publication 15). FUTA is 6.0% on the first $7,000 per employee, with up to a 5.4% credit for state unemployment tax paid, and employers pay it themselves. In "credit reduction" states the credit is reduced, so the effective rate is higher; see Schedule A (Form 940) (IRS Topic 759).
See take-home pay with the paycheck calculator and the salary calculator.
If you pay a contractor
Ask for a Form W-9 before the first payment to get the contractor's name, address and taxpayer ID. You file Form 1099-NEC when nonemployee compensation reaches the threshold. For payments made after December 31, 2025, that threshold is $2,000, and it may be adjusted for inflation starting in 2027 (IRS Instructions for Forms 1099-MISC and 1099-NEC).
- Payments made in 2025 or earlier stay at the $600 threshold.
- Attorney gross proceeds stay at $600 (Form 1099-MISC, box 10).
- If a contractor does not provide a taxpayer ID, the payer may have to apply backup withholding (see the Form W-9 instructions for the rate). A payee subject to backup withholding gets a form regardless of the amount.
- Payments made by credit card or payment card, and certain others such as third party network transactions, are not reported on 1099-NEC (IRS instructions). Those are covered by Form 1099-K, which has its own threshold: more than $20,000 and more than 200 transactions (IRS FAQ).
The threshold only decides whether the business files a form; contractors owe tax on what they earn even below $2,000. Estimate it with the self-employment tax calculator and the income tax calculator.
Asking the IRS: Form SS-8 and VCSP
If a worker's status is unclear, a business or a worker can file Form SS-8 to request an IRS determination. The IRS says it can take six months or more. Eligible businesses can also use the Voluntary Classification Settlement Program (Form 8952) to reclassify workers as employees going forward with partial federal employment tax relief (IRS).
Consequences of misclassification
Treating an employee as a contractor can lead to unpaid employment taxes, and the DOL can pursue unpaid minimum wage or overtime under the FLSA.
Some key dates for 2026 payments, filed in early 2027
Form 1099-NEC is due to the IRS and to the payee by January 31 (IRS). January 31, 2027 is a Sunday, so the deadline moves to Monday, February 1, 2027. Form 940 (FUTA) for 2026 is also due February 1, 2027, or February 10, 2027 if all FUTA tax was deposited when due (IRS). Form W-2 (to employees) and W-2/W-3 (to the SSA) are due the same day, and Form 941 is filed quarterly (IRS Pub. 15). This is not a complete list.
This guide is general information as of October 13, 2026. It covers federal rules only; state rules may differ and can be stricter. It is not legal, tax, employment or immigration advice. Check the official IRS, DOL and state sources, or ask a qualified professional about your situation.
Written by the CentDaily editorial team with AI assistance; facts checked against the official sources listed in this guide and in the Sources box below. General information, not legal, tax or financial advice.