"Can I just pay them as a contractor?"
Owners usually ask this when they need help but aren't ready for payroll. Paying someone as a contractor feels simpler: no withholding, no payroll taxes, just a payment and a form at year-end.
The catch is that the choice isn't only yours. Whether someone is a contractor or an employee depends on how the working relationship actually operates, not on what the agreement calls it. Get it wrong, and the business can owe the payroll taxes it should have paid, plus penalties.
How the difference is judged
The IRS looks at the whole relationship, grouped into three areas. I teach it as three questions:
| Question | Points toward a contractor | Points toward an employee |
|---|---|---|
| Who controls how the work is done? | They decide their own methods, hours and tools | You set the schedule, train them and direct how the work is done |
| Who controls the business side? | They invoice you, can work for others, use their own equipment and can make or lose money on the job | You provide the equipment, pay by the hour and they work only for you |
| What does the relationship look like? | A defined project with an end date | Ongoing, open-ended work that is central to your business, sometimes with benefits |
No single factor decides it. But if you're directing someone's day the way you would an employee's, calling them a contractor won't change how the relationship is judged. Maryland applies its own tests for unemployment insurance and wage purposes, and they can be stricter.
Paying contractors correctly
- Collect a Form W-9 before the first payment. It gives you the contractor's legal name, tax ID and business type. Asking at year-end, after you've already paid them, is much harder.
- Put the arrangement in writing. A short agreement describing the project, deliverables, timeline and payment terms. It won't decide classification by itself, but it documents how the relationship was meant to work.
- Pay by invoice, not by hourly timesheet, where the work allows, and keep every invoice.
- Track the total paid to each contractor for the year. This determines whether you file a Form 1099-NEC.
- Know the new threshold. For payments made in 2026 and later, a 1099-NEC is generally required when you pay one contractor $2,000 or more in a calendar year, up from $600. Payments made in 2025 still use the $600 threshold, on forms filed in early 2026. Some payments, such as legal fees and royalties, follow different rules.
- File and send by January 31. The 1099-NEC goes to both the contractor and the IRS by January 31 of the following year.
What I see go wrong
The most common problem is a contractor who gradually becomes an employee. Someone starts on a short project, then stays on, working set hours under the owner's direction, for years. The paperwork never changes, but the relationship has.
The second is the year-end scramble: no W-9 on file, no running total, and a January 31 deadline. Collecting a W-9 up front avoids most of it.
The third is assuming the new $2,000 threshold means you can stop tracking. You still need records of every payment to support your deductions, whether or not a 1099 is required.
Where to start
List everyone you paid outside payroll this year. For each person, check that you have a W-9 and a running total, then ask the three questions above honestly. Anyone who looks more like an employee is worth a closer look now, not at year-end.
We help businesses set up contractor tracking, W-9 collection and year-end 1099 filing. Questions about employment law or a specific worker's legal status belong with a licensed attorney. Schedule a consultation, and we'll tell you honestly what we see.