Hiring independent contractors can offer your business access to specialized skills and flexibility. However, it’s important to know that independent contractor taxes and forms differ significantly from those of W-2 employees.
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What you’ll learn
What you’ll learn
Key takeaways
- Independent contractors offer specialized knowledge and flexible schedules, providing a major benefit for small businesses without the budget for full-time staff.
- Contractors pay a 15.3% tax (12.4% Social Security + 2.9% Medicare) rather than having taxes withheld by the employer.
- File Form 1099-NEC for any contractor paid $2,000 or more in 2026 (a significant increase from the previous $600 threshold).
- Always collect a W-9 form before a contractor performs their first minute of work to secure their Taxpayer Identification Number (TIN).
- Contractors are responsible for their own quarterly estimated tax payments if they expect to owe at least $1,000.
In this guide, we’ll cover the basics of worker classification, the forms to know when hiring independent contractors, and the due dates to be aware of.
What are independent contractor taxes?
Independent contractor taxes refer to the federal and state taxes that self-employed workers must pay on income earned outside of traditional employment. Unlike employees, contractors are responsible for paying their own income taxes and self-employment taxes, which cover Social Security and Medicare.
Employer vs. contractor responsibilities
Because independent contractors handle their own taxes, the responsibilities of the business and the contractor differ from traditional payroll. The table below highlights the key tax and reporting obligations for each side.
| Topic | Employer responsibility | Independent contractor responsibility |
| Tax withholding | Do not withhold federal income tax, Social Security, or Medicare | Pays income tax and self-employment tax |
| Social Security and Medicare | No employer payroll taxes required | Pays the full 15.3% self-employment tax |
| Required forms | Collect Form W-9 and issue Form 1099-NEC when payments meet IRS thresholds | Provides Form W-9 and reports income on Schedule C |
| Estimated tax payments | Not responsible for paying contractor taxes | May need to make quarterly estimated tax payments (Form 1040-ES) |
| Expense deductions | Generally not responsible for tracking contractor business expenses | Can deduct qualifying business expenses related to their work |
Independent contractor tax obligations
So, do independent contractors pay payroll taxes like regular employees do? The answer is yes, but in a different form. Rather than the employer withholding taxes, independent contractors typically pay a self-employment tax on their taxable income.
Self-employment tax overview
Self-employment tax covers federal Social Security and Medicare taxes for freelancers and independent contractors. Your independent workers who earn $400 per year or more must pay the following:
- Social Security taxes: 12.4% on their total annual income.
- Medicare taxes: 2.9% of total income.
This totals 15.3% of a contractor’s net earnings. While it isn’t your job to manage their education, it is a good idea to encourage them to save about a third of their total income to cover state and federal liabilities.
Estimated quarterly payments
In addition to an annual return, self-employed workers are required to file estimated quarterly payments using Form 1040-ES. These payments are required for anyone who expects to owe $1,000 or more when filing their annual return.
Good to know
If you’re thinking about farming out work to freelancers, understanding independent contractor taxes and knowing how to 1099 someone should be on your to-do list.
Avoiding misclassification risks and penalties
Correctly classifying workers is vital; misclassification can be a costly mistake for a small business.
Potential penalties
- Financial: You may be liable for back taxes, unpaid overtime, and unpaid benefits (sick pay, vacation, etc.).
- Legal: Your business could face litigation costs and liability for unemployment claims.
Prevention tips
- Clear contracts: Explicitly define the scope of work and independent status.
- Regular audits: Review worker relationships frequently to ensure they haven’t drifted into “employee” territory.
- Separate systems: Ensure your payroll and HR systems clearly distinguish between W-2 and 1099 workers.
Before they start a new job or project for your organization, you should have the independent contractors you hire complete specific tax forms.
IRS forms required for independent contractors
There are two key Internal Revenue Service forms for independent contractors: the W-9, Request for Taxpayer Identification Number, and the 1099-NEC for reporting nonemployee compensation.
Form W-9: Request for Taxpayer Identification Number
This form provides the contractor’s legal name and TIN.
- When to collect: Ideally, this should be completed before the contractor performs their first minute of work or receives their first payment.
- Recordkeeping: Employers should maintain W-9 forms for at least four years.
An independent contractor should fill out a W-9 before beginning to work for a company.
Form 1099-NEC: Nonemployee compensation reporting
This form is used to report nonemployee compensation to the IRS.
- The 2026 change: The threshold was historically $600; it is increasing to $2,000 for the 2026 tax year.
- Filing deadline: You must file this and provide a copy to the contractor by January 31st. (Note: If Jan 31st falls on a weekend, you have a small grace period: the next business day.)
We also have an article with instructions on to complete Form 1099 if you’re working with contractors, freelancers, and consultants.
Resources for employers hiring independent contractors
A wealth of resources are available for businesses that choose to hire independent contractors, including the following online options:
- The IRS shares comprehensive tax information for businesses as well as a small business and self-employed tax center. In addition, it offers details on the latest rules and regulations for all things tax-related.
- The U.S. Small Business Administration (SBA) has a free online guide for hiring and managing employees, including a section on filing taxes with independent contractors. You can also check with your state’s small business administration or other organizations that support businesses in your state for local resources.
- The U.S. Department of Labor (DOL) details the latest rules and regulations when it comes to classifying employees, paying independent contractors, and more. The DOL also provides information on compliance, employment laws and benefits, and other worker-specific guidelines.
- Indeed, Upwork, and other online job platforms also offer helpful information on the successful hiring and management of independent contractors.
Simple with support
“I have used OnPay for several years, and they have made my payroll easy. I don’t have to think about processing taxes or whether the paperwork is getting done. Entering hours or figuring out vacation pay — it’s all simple. They have been very helpful when I don’t know what to do. I’m a contractor, so it’s almost like having an HR team on my side.
— Curtis Sandberg, Sandberg's Custom Hardwood Floors
Independent contractors can be an invaluable resource for businesses of all sizes, offering flexibility for busy seasons, affordability, and specific skill sets and expertise. While it may take some time to determine worker classification, payment, and forms, many businesses find it worth their while to welcome independent contractors, consultants, and freelancers to their teams.
Take time to get familiar with independent contractor taxes
Hiring and paying for help comes with specific obligations — from paperwork to proper management of state and federal payroll taxes. For business owners who farm out projects to consultants or freelancers, it makes good business sense to understand how independent contractor taxes work and stay compliant with IRS regulations.
Looking for a simpler solution? OnPay’s payroll & HR software offers seamless contractor payments, advanced onboarding tools, and custom reporting. Wishing your team success and we are here to help if you have any questions.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.