Form 1099-NEC and Worker Classification
Form 1099-NEC reports nonemployee compensation, and it's due January 31 to both the IRS and the recipient.
The reporting threshold changed. It was $600 for tax year 2025 and earlier. For tax years beginning after 2025 it is $2,000, with inflation indexing beginning in calendar year 2027.
Any internal guidance, vendor setup or accounting policy still keyed to $600 is now wrong for 2026 payments.
1099-NEC versus 1099-MISC
Different forms, different contents, and - importantly - different deadlines.
| 1099-NEC | 1099-MISC | |
|---|---|---|
| Reports | Nonemployee compensation, direct sales of $5,000+, excess golden parachute payments | Rents, royalties, prizes, other income, medical and healthcare payments, gross proceeds to attorneys |
| To recipient | January 31 | January 31 |
| To IRS | January 31 | February 28 paper / March 31 electronic |
Filing 1099-MISC on the NEC schedule is harmless. Filing NEC on the MISC schedule is late.
(Separately, and unrelated: the 1099-K third-party network threshold reverted to more than $20,000 and more than 200 transactions. Don't conflate the two changes.)
Is the worker a contractor at all?
The federal tax test has three categories:
Behavioral control - does the business control, or have the right to control, what the worker does and how they do it?
Financial control - how is the worker paid, are expenses reimbursed, who supplies tools and materials, can the worker realise a profit or loss?
Type of relationship - is there a written contract, are there employee-type benefits like insurance, pension or vacation, is the relationship permanent, is the work a key aspect of the business?
No single factor decides it, and the same worker can be classified differently under different laws - which is the next problem.
State tests are stricter, and they're different from each other
Several states apply an ABC test, under which the hiring entity must prove all three prongs or the worker is an employee.
California - the worker is (A) free from control and direction in fact and under the contract, (B) performs work outside the usual course of the hiring entity's business, and (C) is customarily engaged in an independently established trade of the same nature. Prong B is the one most relationships fail. Extensive occupational exemptions route certain workers back to an older multifactor test.
Massachusetts - the same three prongs, with a strong statutory presumption that most people who provide services are employees.
New Jersey - adopted ABC test regulations in May 2026, operative October 1, 2026. Note the difference in prong B: work performed either outside the usual course of business or outside all the places of business. That "or" makes New Jersey's prong B easier to satisfy than California's.
The practical consequence: a worker can be a legitimate contractor federally and an employee under state law simultaneously. Classify against every applicable test, not just the federal one.
What misclassification costs
If reclassified, reduced rates may apply:
| Forms 1099 were filed | Forms 1099 were not filed | |
|---|---|---|
| Income tax withholding | 1.5% of wages | 3% of wages |
| Employee FICA share | 20% of the employee's portion | 40% of the employee's portion |
Failing to file the 1099s doubles the exposure. If you're going to treat someone as a contractor, file the form - the reporting is what preserves the reduced rates.
Section 530 relief
Relief from employment tax liability is available if all three conditions are met:
- Reporting consistency - you timely filed all required federal returns, including Forms 1099, consistent with non-employee treatment
- Substantive consistency - you haven't treated the worker, or any worker in a substantially similar position, as an employee for any period after 1977
- Reasonable basis - reliance on a prior audit, judicial precedent, industry practice, or another reasonable basis
Important limitation: Section 530 does not determine the worker's actual classification. It shields you from the employment tax liability. The worker may still be an employee for every other purpose.
Two formal routes
Form SS-8 asks the IRS to determine worker status. Either the firm or the worker may file. Expect it to take at least six months - it is not a fast answer.
The Voluntary Classification Settlement Program lets an eligible employer reclassify prospectively. Apply on Form 8952, at least 120 days before the intended reclassification date. The payment is 10% of the employment tax liability that would have been due on those workers' compensation for the most recent tax year, computed at the reduced rates. Relief includes no interest or penalties on the settlement amount and no employment tax audit of prior years for those workers.
Eligibility requires consistent contractor treatment for the prior three years with all 1099s filed, and that you are not currently under IRS employment tax audit or under a Department of Labor or state classification audit.
The federal labour standards test is in flux
Separately from the tax test, there's a labour-law test that determines overtime and minimum wage coverage. Its status right now is genuinely unsettled:
- A 2024 rule applying a six-factor economic reality test took effect in March 2024.
- In May 2025, the Department of Labor instructed its investigators to stop applying it in enforcement, relying on earlier guidance instead.
- In February 2026, the Department published a proposal to rescind the 2024 rule and extend a unified test across several statutes. Comments closed in April 2026 and no final rule has been issued.
Frequently asked questions
What's the 1099-NEC threshold?
$2,000 for tax years beginning after 2025. It was $600 for 2025 and earlier.
When is it due?
January 31, to both the IRS and the recipient.
Can someone be a contractor federally and an employee under state law?
Yes. Several states apply a stricter ABC test.
What if we don't file the 1099s?
The reduced assessment rates double if reclassification occurs.
Does Section 530 mean the worker is a contractor?
No. It shields you from employment tax liability. It doesn't determine status.
How long does Form SS-8 take?
At least six months.
This guide is general information about reporting requirements, not legal advice. Verify current deadlines, thresholds and penalty amounts against the issuing agency before you file.