A 1099 contractor is a US worker paid as an independent contractor, not an employee, so the payer does not withhold income tax or pay the employer share of payroll taxes. The name comes from Form 1099-NEC, which reports their pay. Misclassifying employees as contractors carries real legal risk.
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A US worker paid as an independent contractor, not an employee, so no tax is withheld. Misclassifying employees as contractors carries legal risk.
Classification depends on the real working relationship, not the job title or the contract. The IRS looks at behavioral control, financial control and the type of relationship. The Department of Labor applies an economic reality test under the Fair Labor Standards Act, and in early 2026 proposed returning to a test that weighs control and opportunity for profit or loss most heavily. Many states use their own, often stricter tests, such as the ABC test.
For tax reporting, a business files Form 1099-NEC for nonemployee pay above a threshold. That threshold was $600 for many years and rises to $2,000 for payments made in 2026 under recent federal law. Contractors pay self employment tax themselves and usually do not receive benefits, overtime or unemployment coverage from the client. Rules vary by state and change, and this is not legal or tax advice.
Why it matters to recruiters
Recruiters meet 1099 questions all the time: candidates asking to be paid as contractors, clients wanting to avoid payroll, or staffing firms offering 1099 and W2 options. Getting it wrong can expose the client or agency to back taxes, penalties and wage claims. Knowing the basics helps you flag risk early and steer people to the right setup, such as W2 through an agency or an employer of record.
An example from a recruiting desk
A startup asks an agency to place a full time developer as a 1099 contractor working fixed hours, using company equipment and reporting to a manager. The recruiter points out that this looks like employment under most tests. The client instead engages the developer as a W2 contractor through the agency, which runs payroll and handles taxes.
Tips that help
Judge classification by how the work is done, not by what the contract says.
Check the state test where the worker lives and works, which may be stricter than federal rules.
Offer W2 through an agency or employer of record when a role looks like employment.
Ask employment counsel or a tax adviser when a case is unclear.
Mistakes to avoid
Treating a signed contractor agreement as proof the worker is a contractor.
Paying long term, full time, closely managed workers on 1099 to save payroll costs.
Frequently asked questions
What is the difference between a 1099 contractor and a W2 employee?
A W2 employee is on payroll, with taxes withheld and the employer paying its share of payroll taxes. A 1099 contractor runs their own business, controls how the work is done and pays their own self employment tax. The real relationship decides which applies.
What is the ABC test?
The ABC test, used by several states, presumes a worker is an employee unless the business shows they are free from control, do work outside the usual course of the business, and run an independent trade or business. Rules vary by state and change. This is not legal advice.
Can a staffing agency place 1099 contractors?
Some do, especially for independent consultants with their own businesses or corporations. Many agencies prefer W2 or corp to corp arrangements because misclassification risk can fall on both the agency and the client. Check the facts of each engagement.
