W-2 vs. 1099: What's the Difference for Contractors?

By BRIX Editorial Team · Updated October 12, 2026

A W-2 worker is an employee: you control how the work is done, withhold income tax, and pay the employer share of Social Security, Medicare and unemployment taxes. A 1099 worker is an independent business that controls its own methods and pays its own self-employment tax. The facts of the relationship decide which one someone is, not the paperwork.

Key takeaways

The IRS weighs three kinds of evidence: behavioral control, financial control and the relationship of the parties. No single factor decides it.
Calling someone a sub, signing a contract or sending a 1099 doesn't make them one if they work like an employee.
For 2026, an employee costs you at least 7.65% in employer Social Security and Medicare on wages (6.2% Social Security up to $184,500, plus 1.45% Medicare), plus federal and state unemployment tax.
Misclassifying an employee can make you liable for the employment taxes you didn't withhold or pay.
Either side can ask the IRS for a ruling on Form SS-8, and the Voluntary Classification Settlement Program offers partial relief for businesses that fix it themselves.

How the IRS decides: the common-law control test

Under IRS rules, a worker is generally an employee "if you have the right to control what will be done and how it will be done," even if you give them freedom in practice. To apply that, the IRS looks at three categories of evidence and tells businesses to weigh all of them and document their reasoning.

The IRS's three categories, in trades terms
Category	The IRS question	Points toward employee (W-2)	Points toward contractor (1099)
Behavioral control	Does the company control, or have the right to control, what the worker does and how they do it?	You set the hours, assign the jobs, train them on your methods, inspect how they work	They decide how to do the job and when; you check the finished result
Financial control	Are the business aspects of the job controlled by the payer?	Hourly pay, you supply the truck and tools, you reimburse expenses, no chance of loss	Bid or flat price per job, own tools and truck, own insurance, can make or lose money on a job, works for others
Relationship of the parties	Are there written contracts or employee-type benefits, and is the work ongoing and central to the business?	Open-ended, works only for you, gets benefits, does your core work every day	Defined project, written subcontract, advertises to other customers, licensed and insured under their own name

Source: IRS, Independent contractor (self-employed) or employee?, checked 2026-10-12.

What do real construction cases look like?

IRS Publication 15-A (2026) includes a set of building and construction examples. They're useful because they show how the same trade can land on either side depending on the facts.

IRS examples from Publication 15-A (2026), summarized

Employee: tile setter paid by the piece. A tile and terrazzo worker uses his own tools but works full time at the company's job sites, follows its order and specifications, has his work inspected, has no separate business location and doesn't work for anyone else. Either side can end it at any time. The IRS conclusion: he "is an employee of the corporation."

Employee: remodel supervisor and helpers. A homeowner pays for materials directly, insures the workers, pays them hourly and supervises closely. The supervisor can't move his helpers to other jobs and isn't liable if the project isn't finished. The IRS conclusion: he and the assistants are the homeowner's employees.

Independent contractor: roofer on a flat fee. A licensed roofer signs a flat-fee contract, carries his own insurance under his business name, hires and pays his own crew as his employees, and pays for any repairs. The IRS conclusion: he is an independent contractor.

Independent contractor: electrician on a fixed bid. An electrician bids a fixed $6,400 for an estimated 400 hours, gets paid in installments regardless of the actual hours, and finds other work through advertising. The IRS conclusion: she is an independent contractor.

Notice what didn't decide those cases: owning tools, being skilled, or being paid per piece. The tile setter brought his own tools and still came out an employee. What tipped them was control of the work, who carried the financial risk, and whether the worker ran a real business serving other customers.

How much does a W-2 employee cost compared with a 1099 sub?

For a W-2 employee, you withhold income tax and the employee's share of FICA, and you pay your own share of Social Security and Medicare plus federal unemployment tax (FUTA) and state unemployment tax. For a 1099 sub, you pay the invoice; the sub pays self-employment tax and their own income tax. Here are the 2026 federal rates.

Federal employment taxes, 2026
Tax	W-2 employee: employer pays	W-2 employee: withheld from pay	1099 sub
Social Security	6.2% of wages up to $184,500	6.2% of wages up to $184,500	You pay nothing; the sub pays 12.4% SE tax on their own earnings
Medicare	1.45% of all wages	1.45%, plus 0.9% Additional Medicare Tax on wages over $200,000	You pay nothing; the sub pays 2.9% SE tax
FUTA (federal unemployment)	6.0% of the first $7,000; up to a 5.4% credit for state unemployment tax paid, usually 0.6% net	None	None
Federal income tax	None	Based on the employee's Form W-4	Sub pays through estimated taxes

Sources: IRS Publication 15 (2026) and Topic No. 554, checked 2026-10-12. State unemployment tax, workers' compensation and state income tax withholding vary by state and are not shown.

What happens if you misclassify a worker?

The IRS says that if you treat an employee as a contractor without a reasonable basis, you may be held liable for employment taxes for that worker. On top of the federal side, state agencies enforce their own rules for unemployment insurance, workers' compensation and wage laws, and some states use stricter tests than the IRS. A misclassified worker who gets hurt on the job without workers' comp coverage is the scenario that does the most damage to a small contractor.

Form SS-8: either you or the worker can file it to ask the IRS for an official determination. The IRS says it can take at least six months.
Voluntary Classification Settlement Program (VCSP): an optional IRS program that lets eligible businesses reclassify workers as employees going forward with partial relief from federal employment taxes. You apply on Form 8952.
Form 8919: a worker who believes they were misclassified can use it to report their share of uncollected Social Security and Medicare taxes.

Does the Department of Labor use the same test?

No. Wage-and-hour law (minimum wage and overtime under the Fair Labor Standards Act) uses an "economic reality" test that asks whether the worker is in business for themselves or economically dependent on you. On February 26, 2026, the DOL proposed a rule to replace its 2024 independent contractor rule with a streamlined test that treats control and opportunity for profit or loss as the core factors, alongside skill, permanence and whether the work is integrated into your business. As of October 12, 2026, the DOL's page lists it as a proposal, and the DOL says it is no longer applying the 2024 rule in its investigations. A worker can be a contractor for one test and an employee for another, so classify for the strictest one that applies to you.

W-2 vs. 1099 by trade: where the line usually falls

Common arrangements (patterns, not rulings)
Trade	Usually a genuine 1099 sub	Often really a W-2 employee
HVAC	Duct fabricator or insulation crew bidding jobs for several contractors	Install helper who rides in your truck on your schedule
Plumbing	Licensed sewer-camera or excavation outfit billing per job	Apprentice assigned daily calls by your dispatcher
Roofing	Crew lead with own insurance, own crew and a flat price per square	Laborers paid by the day who only work your jobs
Electrical	Licensed electrician bidding fixed-price rough-ins, advertising to others	Journeyman paid hourly who works only for you
Landscaping	Irrigation or hardscape specialist with own equipment	Mow crew member on your routes in your trucks
Cleaning	Carpet or window specialist with other commercial clients	Cleaner scheduled and supervised by you daily

Illustrative patterns only. The answer for any worker depends on all the facts; ask a CPA, enrolled agent or employment attorney.

Common mistakes

Classifying by preference. "He'd rather be 1099" isn't a test. The worker can't opt out of employee status.
Relying on the contract. A subcontract helps document a real business relationship; it doesn't overcome day-to-day control.
Forgetting the state. State unemployment and workers' comp agencies may apply different, often stricter, tests.
Switching a W-2 tech to 1099 with no change in the work. Same truck, same schedule, same supervisor is the same job.
Not documenting. Keep the W-9, subcontract, certificate of insurance, license and invoices for every sub.

Frequently asked questions

Is it better to be W-2 or 1099 for a contractor's workers?

It isn't a choice you get to make on cost alone. The IRS decides status from the facts: who controls how the work is done, who carries the financial risk and what the relationship looks like. If you control the work like an employer, the worker is an employee and belongs on W-2 payroll.

Can I pay a helper on 1099 if he has his own tools?

Owning tools is only one factor. In an IRS construction example, a tile setter who used his own tools was still an employee because he worked full time at the company's sites, followed its specifications, was inspected and didn't work for anyone else.

How much more does a W-2 employee cost than a 1099 contractor?

In 2026, the federal employer share is 6.2% Social Security on wages up to $184,500, 1.45% Medicare, and FUTA of usually $42 per employee when the full state credit applies. State unemployment tax, workers' compensation and benefits come on top and vary by state.

What is the penalty for misclassifying an employee as a 1099 contractor?

The IRS says a business that treats an employee as a non-employee without a reasonable basis may be held liable for employment taxes for that worker. States can add unemployment insurance, workers' compensation and wage-law liabilities. The IRS's Voluntary Classification Settlement Program offers partial relief to businesses that fix it voluntarily.

Can a worker be both a W-2 employee and a 1099 contractor for the same company?

Only if the two kinds of work are genuinely separate and each passes its own test, which is rare and draws scrutiny. Paying the same person W-2 for some hours and 1099 for overtime or side jobs doing the same work is a red flag. Get a CPA or attorney's view first.

How do I get an official IRS ruling on a worker's status?

File Form SS-8, Determination of Worker Status. Either the business or the worker can file it. The IRS reviews the facts and issues a determination, which it says can take at least six months.

Does the Department of Labor use the IRS test?

No. For minimum wage and overtime, the DOL uses an economic reality test. In February 2026 it proposed a streamlined version focused on control and opportunity for profit or loss; as of October 12, 2026 that rule was still a proposal. State laws may use stricter tests.

Sources

IRS — Independent contractor (self-employed) or employee? (checked October 12, 2026)
IRS — Publication 15-A (2026), Employer's Supplemental Tax Guide (building and construction examples) (checked October 12, 2026)
IRS — Publication 15 (2026), Employer's Tax Guide (checked October 12, 2026)
IRS — Topic No. 554, Self-employment tax (checked October 12, 2026)
U.S. Department of Labor — 2026 NPRM: Employee or independent contractor status (RIN 1235-AA46) (checked October 12, 2026)
U.S. Department of Labor — News release: proposed rule on employee and independent contractor status (Feb. 26, 2026) (checked October 12, 2026)