I hired my first contractor. How does it impact my taxes?

For a while, you were the contractor. You did the work, you sent the invoice, and every January a little stack of 1099s showed up in your inbox reminding you what you'd earned. You were the recipient.

Then one day the business got busy enough that you paid someone else to help. A designer. A virtual assistant. A developer who fixed the thing you'd been avoiding for three weeks.

Congratulations, that's a real milestone. But here's the part nobody warns you about: the moment money leaves your account and lands in another self-employed person's account, you quietly change roles. You're not the recipient anymore. You're the issuer, and issuers have homework.

Don't panic. It's less homework than being an actual employer, and once you see the three jobs laid out, it stops being scary. Let's walk through them.

When you pay another self-employed person to help with your business, you inherit a slice of what employers do: you have to verify who they are (a W-9), report what you paid them (a 1099-NEC), and get the label right (contractor vs. employee).

That's it. Three jobs. The catch is that each one has a real penalty attached if you skip it,  so let's do them in the order that actually protects you.

This is the boring one that turns out to be the expensive one, so we're doing it first.

You might assume "contractor vs. employee" is just a word you get to choose. It isn't. The IRS decides based on the reality of the working relationship, not the title you slapped on it. They look at three buckets of evidence. This is called the common-law test:

• Behavioral control — Do you control how the work gets done? Their hours, their methods, whether you train them? Or do you just care about the finished result?

• Financial control — Do they use their own tools and cover their own expenses? Do they have other clients and a real chance to make a profit or take a loss?

• Type of relationship — Is there a contract? Do they get benefits? Is the arrangement permanent? Is their work central to what your business does, or a side task?

No single answer decides it. The IRS looks at the whole picture. But here's the plain-English gut check:

If you set their hours, you handed them a company laptop, and they work only for you, calling them a contractor doesn't make them one.

Why does this matter so much? Because if you misclassify an actual employee as a contractor, you become liable for the employment taxes that should have been withheld all along, plus penalties. That's the one that turns a small helper into a big bill.

If it's genuinely a close call, you can file Form SS-8 and ask the IRS to make the ruling for you. Fair warning: it's slow, it can take months, but the answer is definitive. One more thing to check: some states use even stricter tests than the IRS (you may have heard of "ABC" tests). State rules are their own rabbit hole, so look up the ones where you operate.

A W-9 is a short form your contractor fills out and hands to you. It collects their legal name, business name, address, and their taxpayer ID number (either a Social Security number or an EIN), signed to certify it's correct.

You keep it in your files. You never send it to the IRS. Think of it as the information you'll need later to fill out their 1099, you're just grabbing it now while the person is friendly and responsive, instead of chasing them in January when everyone's slammed.

Do this before the first payment. This is the single step everyone skips and everyone regrets.

Here's the "or else" that makes it non-negotiable. If a contractor won't give you a valid taxpayer ID number, the IRS doesn't just shrug. It requires you to hold back 24% of their payments and send that money to the IRS yourself. This is called backup withholding, and it turns you into a reluctant tax collector for someone else's missing paperwork.

No W-9, no first cheque.

The 1099-NEC ("NEC" stands for nonemployee compensation) is the form where you formally tell the IRS, "I paid this person this much for their work this year." You send one copy to the contractor and one to the IRS.

Who needs one? Any individual or unincorporated business you paid $2,000 or more during 2026 for services.

That $2,000 figure is new and worth celebrating, for over 70 years the threshold was stuck at just $600. Starting with 2026 payments, it more than tripled. A couple of quick clarifications people trip on:

• Corporations are generally exempt. If your contractor operates as a corporation, you usually don't issue a 1099-NEC. The classic exception is attorneys, pay a lawyer and it's reportable regardless.

• Goods don't count, services do. If you bought $3,000 of materials, that's not a 1099-NEC. If you paid $3,000 for someone's labor, it is.

Here's a genuinely common and expensive mix-up. If you paid your contractor by credit card or through a payment platform such as PayPal business, Stripe, and the like, you do not issue a 1099-NEC for those payments. The processor reports them on a separate form called a 1099-K.

If you issue a 1099-NEC and the platform issues a 1099-K for the same money, you've just double-reported that income to the IRS, and your contractor gets taxed twice on paper for one payment. So, 1099-NEC is for money you sent by cash, check, or bank transfer. Card and app payments are already covered. Leave those alone.

The IRS prices these by how late you are. These are per form, so if you owe a handful, it adds up fast:

And a sneaky detail: there are really two obligations hiding in one form, furnishing the copy to your contractor, and filing with the IRS. If you miss both, the penalty applies to each failure separately. One neglected form can cost you twice.

New hirers tend to over-worry here, imagining they've signed up to run a payroll department. You haven't. For a genuine contractor, you are not on the hook for:

• Withholding their income tax, Social Security, or Medicare. That's their problem to sort out through self-employment tax, the same tax you deal with on your own income.

• Employer payroll taxes, federal unemployment tax, workers' comp (in most states, for genuine contractors), or benefits of any kind.

• A W-2 or a payroll system. None of it.

Boil it down and the whole relationship is: one form in (the W-9), one form out (the 1099-NEC), once a year.

That lightness is the entire economic point of hiring contractors, and it's exactly why the IRS guards the classification line so carefully back in Job 1. The relief in this section is precisely what you'd lose if you got the label wrong.

Here's the good news buried inside all this. Money you pay contractors is a deductible business expense, it goes on Schedule C, line 11, "Contract labor." For a lot of first-time hirers, it's the single biggest deduction on the whole return. Every dollar you track here is a dollar you're not overpaying tax on.

But look at everything now riding on one payment to one person. For a single contractor, you need:

1. A W-9 on file (collected up front).

2. A running total of what you've paid them, so you know if you've crossed $2,000.

3. The payment method noted (so you know whether it's your 1099-NEC to file or the platform's 1099-K).

4. The expense captured for your own deduction.

Notice that the scariest question in this whole piece: "Did I cross $2,000 with this person?"  is really just a running-total question. And running totals are exactly what your books are for.

Think about where all this actually lives. The contractor's invoice, your payment confirmation, the back-and-forth over the W-9, it all happens in your inbox. The documents are already there. The problem isn't missing information, it's that nobody's keeping the tally by hand, and the obligations attach to a total no human is tracking.

That's the gap Posted is built to close. When something watches your inbox, it can nudge you in October, "You've now paid Sam $1,800. One more invoice and you'll owe a 1099-NEC", instead of leaving you to discover it in a February panic. The paperwork you inherited the day you became an issuer is real, but it's the kind of thing that's trivial when you see it coming and miserable when you don't.

You hired help because you were growing. This is just the part of growing up nobody put on the invoice.

This article is general information, not tax advice — when a specific situation is on the line, check with a tax professional or confirm the current rules at IRS.gov.