Employee or Independent Contractor?
From Tax Guide.
Tax Guide · Arab, Alabama
Independent Contractor Taxes and the 1099-NEC
Independent contractors get a 1099-NEC, not a W-2, and pay their own taxes. Learn what it means, who must issue one and how to stay on track.
The short answer
What is a 1099-NEC?
Form 1099-NEC reports nonemployee compensation, meaning what a business paid you for work you did as an independent contractor rather than as an employee.
The business sends one copy to you and one to the IRS. Employees, by comparison, get a W-2. The "NEC" stands for nonemployee compensation. Before this form was used for that purpose, contractor pay was often reported elsewhere, so older paperwork may look different.
A contractor is someone who offers services to the public, sets their own methods and schedule, and usually supplies their own tools. Plumbers, freelance designers, bookkeepers and delivery drivers are common examples.
Getting the form is not what makes the income taxable. The money you earned counts whether or not a form arrives, and it is on you to report it.
If you receive one
How are independent contractor taxes different from being an employee?
As a contractor, no one withholds income tax or Social Security and Medicare tax from your pay, so you handle both yourself.
The differences show up all through the year, not just at filing.
| Topic | Employee (W-2) | Contractor (1099-NEC) |
|---|---|---|
| Tax withheld from pay | Yes | No |
| Social Security and Medicare | Shared with the employer | You pay both halves |
| Business expenses | Generally not deductible on your own return | Deductible on Schedule C |
| Filing | Form 1040 with the W-2 | Form 1040 with Schedule C and Schedule SE |
| Payments during the year | Through withholding | Usually estimated payments |
Payers cannot simply label a worker as a contractor. The relationship decides, not the form.
Your responsibilities
What do I do with a 1099-NEC when filing my taxes?
You report the income on Schedule C along with your business expenses, then figure self-employment tax on Schedule SE.
Forms usually arrive in early winter, both by mail and often in an online portal. Gather all of them before you file, because a missing one is easy to overlook.
Total every 1099-NEC you received, and add any other income that did not come with a form. Then subtract the costs of doing the work. Our guide on business expense deductions shows what usually counts. Your profit is what gets taxed, not the gross amount on the form.
Read the form when it arrives. If the amount or name looks wrong, ask the payer for a corrected form instead of guessing. The IRS receives its own copy, so a mismatch can trigger a letter.
Most contractors also need to make estimated quarterly taxes throughout the year, and figure the self-employment tax on top of income tax.
If you pay contractors
Do I have to issue a 1099-NEC to a contractor?
Generally, a business that pays a contractor at or above an IRS reporting threshold during the year must send that contractor a 1099-NEC and file a copy with the IRS.
The threshold and the deadline are set by the IRS, and they can change, so confirm them each year. A few points are steady:
- Collect a Form W-9 from a contractor before you pay them, so you have the correct name and taxpayer number
- Payments to corporations are often, but not always, exempt from 1099-NEC reporting
- Payments for personal purposes do not count, only for your business
- Late or missing forms can bring penalties, so track payments all year
Classification
Is my worker really an independent contractor?
It depends on the facts, mainly how much control the business has over how the work is done, the financial arrangements and the type of relationship.
Misclassifying an employee as a contractor can lead to payroll tax bills, penalties and interest. We explain the tests in employee or independent contractor. If you do have employees, see W-2 and W-4 forms for employers.
Workers who are unsure of their status can also ask the IRS for a determination on Form SS-8, though that takes time. It is often better to sort the facts out before the year ends.
Watch for scams
What if I did not get a 1099-NEC?
You still must report the income, because the requirement to report does not depend on receiving the form.
Use your own records, invoices and bank deposits to total what you earned, and ask the payer for the form. If they do not send it, keep a note of your request. We can help you decide how to report it.
Be careful with anyone claiming to be the IRS who calls or texts about your 1099. The IRS first contacts people by mail. Do not give out account or Social Security numbers to unsolicited callers.
How we can help
Help with contractor taxes in Arab, Alabama
Melton Tax Services prepares income tax returns for independent contractors and other self-employed people.
We organize your 1099 income and expenses, prepare Schedule C, and explain what you owe. See our income tax preparation page, use the contact page or call 256-586-4635.
We serve Arab and the surrounding area. Please bring your 1099 forms to the office instead of sending them through the website.
Answers
Questions about 1099-nec and contractors
Can I be both an employee and a contractor?
Yes. Many people hold a job with a W-2 and also earn 1099 income on the side. Each source is reported separately, and the side income usually calls for self-employment tax and possibly estimated payments.
What if my 1099-NEC has the wrong amount?
Contact the payer and ask for a corrected form. Do not ignore the error, because the IRS has its own copy. Keep your records so you can show what you actually earned.
Do I still pay tax if I earned very little on a 1099?
Income is reportable no matter how small. Whether you owe tax depends on your total profit and the rest of your return. Self-employment tax has its own IRS threshold.
Is a 1099-NEC the same as a 1099-K?
No. A 1099-NEC is issued by a business that paid you directly for services. A 1099-K comes from a payment platform or card processor. See our guide on gig work and side hustle taxes for more.
Do I need to send a 1099 to someone I paid by credit card?
Payments made through a credit card or a payment platform are generally reported by the processor on a 1099-K instead. The rules have exceptions, so confirm before assuming.
Does Alabama treat contractors differently?
Alabama has its own income tax rules and generally taxes contractor profit that is taxable federally. Alabama may also have its own reporting rules for payers, so we check how they apply.
Read next
Related reading
Self-Employment Tax Explained: What You Owe and Why
From Tax Guide.
Estimated Quarterly Taxes: Who Pays and How It Works
From Tax Guide.
W-2 and W-4 Forms for Employers
From Tax Guide.
Income Tax Services
A service Melton Tax Services provides.
Melton Tax Services
Questions about your taxes or your business?
Our team in Arab is just a phone call away, and we are glad to talk it through with you.