The person doing work for you is either an employee or an independent contractor, and the paperwork follows from that one call. An employee gets a W-2; a contractor gets a 1099. That label sets what you withhold and what you owe, and it gets expensive if the IRS or the state later decides you picked wrong.
What a W-2 Employee Is
A W-2 goes to someone you hire as an employee. You control how and when the work gets done, and in return you take on the payroll side of the relationship. That means withholding federal income tax, Social Security, and Medicare from each paycheck, paying the employer half of Social Security and Medicare yourself, and covering federal and Florida unemployment tax. Florida has no state income tax, so there is no state income-tax withholding, but the employer reemployment tax still applies. In most cases you also carry workers' compensation coverage.
At year end you hand the employee a W-2 that totals their wages and everything withheld, and you file a copy with the Social Security Administration.
What a 1099 Contractor Is
A 1099-NEC goes to an independent contractor, someone running their own business who you pay for the finished work while they decide how it gets done. You withhold nothing. The contractor covers their own income tax plus self-employment tax, which is both halves of Social Security and Medicare.
The reporting threshold changed recently, so this is worth getting current on. For payments made in 2026, you issue a 1099-NEC once you pay a contractor 2,000 dollars or more across the year, up from the 600 dollars that stood for decades. A 2025 law raised it, and the figure is set to adjust for inflation in the years after. Two things stay true regardless of the threshold: a contractor owes tax on what you paid even when the total lands underneath it and no form is required, and you are wise to collect a completed W-9 from every contractor before the first payment. That form gives you their legal name and taxpayer ID, and a total that looks small in June can cross the line by December. Chasing a W-9 down in January, after the work is long done, is a headache you can skip by asking up front.
The Test That Decides It
You don't get to pick the label based on which is cheaper. It comes from the working relationship, and the IRS sorts that into three categories:
- Behavioral control. Do you direct how the work is done, set the hours, and provide training and tools? That points toward employee.
- Financial control. Does the worker have their own business expenses, invoice you, and take on the chance of a profit or a loss? That points toward contractor.
- Type of relationship. Is there an ongoing, open-ended arrangement with benefits, or a defined project with a contract? Written terms and permanence both weigh in.
No single factor is the whole answer. You weigh them together, and if a real case is genuinely unclear, either side can file Form SS-8 and ask the IRS to make the determination. The rule of thumb that gets people in trouble is treating a full-time, you-tell-them-what-to-do worker as a 1099 to dodge payroll tax. That is the exact pattern audits look for.
1099 vs. W-2: A Side by Side
What misclassification costs you
Paying an employee as a contractor looks cheaper on paper because you skip the employer taxes and the withholding. If the classification is later found wrong, those skipped taxes come due as back taxes, usually with interest and penalties attached. The worker can raise the question too, since a 1099 puts the full tax burden on them.
How It Shows Up in Your Books
Contractor payments and employee pay run through your accounting differently. Contractors go to their own expense account with a W-9 on file for each person, so the 1099 totals in January come straight off a report. Employee pay runs through payroll, where wages, withholding and the employer taxes each land in their own account and reconcile back to what you actually paid.
This is where a bookkeeper earns their keep. We keep the contractor and payroll records straight through the year, reconcile them, and have the year-end forms ready when the deadlines come, so nothing gets reconstructed from memory in a hurry. If your books have fallen behind, our guide on catching up on months of bookkeeping walks through getting current, and our payroll services page covers how we run payroll for Orlando businesses.
A note on gray areas
One honest note: classification is a legal determination, and this article is general information, not tax or legal advice for your specific situation. If a particular hire is a genuine gray area, confirm it with the IRS guidance or a qualified professional before you lock it in. At Shea Business Solutions we keep the monthly books and payroll records that make classification and year-end filing straightforward. If you want a second set of eyes on how your workers are set up, reach out for a free consultation.