The Ledger: Employee or Independent Contractor? Getting Federal Worker Classification Right

Molly Shattuck, CPA
Director

Correctly classifying workers is important for any organization. A worker’s classification affects payroll taxes, tax reporting and the organization’s potential exposure if the IRS determines a worker was misclassified.

Employee or independent contractor?

The IRS generally looks at the degree of control and independence in the working relationship. A worker is generally an employee when the organization has the right to control not only what work is done, but also how it is done.

The IRS considers three broad categories:

• Behavioral control: Does the organization provide instructions about when, where or how the work should be performed? Does it provide training?
• Financial control: Does the worker make a significant investment, incur their own business expenses, have an opportunity for profit or loss, or make their services available to others?
• Type of relationship: Does the worker receive employee-type benefits? Is the relationship expected to continue indefinitely? Are the worker’s services a key part of the organization’s regular business?

No single factor determines the answer. The IRS looks at the facts and circumstances of the entire relationship. Simply calling someone an “independent contractor” does not make them one in the eyes of the IRS.

Why classification matters

Employees generally receive Form W-2, and the employer is responsible for withholding and paying applicable employment taxes.

Independent contractors generally receive Form 1099-NEC when payments for services meet the applicable reporting requirements. Independent contractors are generally responsible for their own income and self-employment taxes.

Misclassification can be costly

If a worker who should have been treated as an employee is incorrectly classified as an independent contractor, the organization may become responsible for employment taxes, penalties and interest. That’s why it is important to consider worker classification before deciding how someone will be paid or reported.

New 1099-NEC threshold for 2026

Beginning with tax year 2026, the federal reporting threshold for certain payments reported on information returns, including nonemployee compensation, increases from $600 to $2,000. The threshold may be adjusted for inflation beginning in 2027.

Organizations should keep in mind that exceptions and other reporting requirements can apply, so the dollar threshold alone does not determine every Form 1099 filing obligation.

We can help

Centennial can assist with your organization’s Form 1099 filing needs and help you evaluate whether a worker should be treated as an employee or independent contractor. If you’re unsure about a worker’s classification, it’s best to address the question before year-end reporting begins.