USA — Independent Contractor Payment (1099-NEC) vs. Employee — No Withholding, No Employer Taxes

💡 Accountant's Note

Independent contractor (IC) payments differ fundamentally from employee payroll: the company pays the full contracted amount with NO withholdings of any kind. The contractor is responsible for their own taxes — self-employment tax (15.3% SE tax = both the employee and employer FICA portions), estimated quarterly federal income taxes (Form 1040-ES), and state estimated taxes. The company has NO payroll tax obligations on IC payments — no employer FICA match, no FUTA, no SUI. However, the company MUST file Form 1099-NEC (Nonemployee Compensation) for any IC paid $600 or more in a calendar year — due to the IRS and contractor by January 31. Failure to file 1099-NEC triggers penalties ($60–$630 per unfiled form depending on latency and employer size). MISCLASSIFICATION RISK: The IRS uses a common-law 20-factor test; the DOL uses an economic realities test; California uses the ABC test (AB5). Misclassifying employees as ICs creates retroactive liability for: (1) employer FICA on all payments for open statute of limitations years (3 years ordinarily; 6 years if >25% of wages unreported), (2) FUTA on first $7,000/worker/year, (3) SUI by state, (4) FLSA overtime back pay, (5) benefits denied (health insurance, 401k), (6) employee portion of FICA not withheld (the employer bears this if they failed to withhold). The total exposure can exceed 2× the IC payments.