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United States · Contractor taxation guide · 2026
Hiring in the US?
Here’s where the money actually goes
Start with the calculator: enter what you pay, pick the kind of state your contractor lives in, and see what actually reaches them. Below it — whether you file anything with the IRS at all, which of the four classification tests you are judged against, and what else their state decides.
General information, not tax or legal advice. The US raised its 1099 reporting threshold on 1 January 2026 and has had its federal contractor rule under rewrite since May 2025, so treat every number here as a starting point and check which state your own contract falls under.
Three taxes. Here’s what each one costs
Nothing comes out of your invoice. The contractor pays federal income tax, self-employment tax and state income tax themselves, four times a year, out of money you have already sent. That gap is where rate conversations come from.
Self-employment tax is the one that surprises foreign buyers. It covers Social Security and Medicare, and a contractor pays both halves rather than splitting them with an employer. Half of it comes back as a deduction against their income tax, though the surtax below never does.
Today, 2:15pm
Combined rate – 15.3%
Tomorrow, 11am
Social Security stops at – $184,500
Tomorrow, 2pm
Above $200,000 – add 0.9%
Federal income tax is progressive, and it sits on top of self-employment tax rather than replacing it. There is no flat contractor rate anyone can quote you. A deduction on business income takes the edge off, and they settle the rest in four instalments.
Today, 2:15pm
Withheld from your payment – 0%
Tomorrow, 11am
Deduction on business income – 20%
Tomorrow, 2pm
Filed and paid by – the contractor
State income tax is the range that decides the number, and it splits the country three ways. Nine states take nothing. About sixteen charge one flat rate, Arizona lowest and Idaho highest. The rest run brackets, California the steepest, before any city adds its own.
Today, 2:15pm
Nine states – 0%
Tomorrow, 11am
Flat-rate states – 2.5% to 5.3%
Tomorrow, 2pm
Bracketed states – up to 13.3%
A year in the life of a US contractor’s taxes
31 January
The 1099 deadline, if it reaches you
To the contractor and to the IRS alike, or the next business day when the 31st is a weekend. Only above $2,000, and only if you file US information returns. Backup withholding is reportable at any amount.
15 April
The return, and the first instalment
Their annual return and the first estimated payment of the new year land on the same day. A contractor who priced the engagement without allowing for self-employment tax finds out here. The shortfall reaches you as a rate request.
15 June,
15 September
and 15 January
15 September
and 15 January
Instalments two, three and four
Quarterly in name only: the second period covers two months, the third three, the fourth four. Estimated payments start at $1,000 owed for the year, and anyone who underpaid is accruing a penalty by the last one.
Watch continuously
The $2,000 line
The reporting threshold more than tripled from $600 for 2026 payments, and starts moving with inflation in 2027. If you file 1099s at all, last year’s number is not this year’s.
Before you sign
Deadlines are the contractor’s problem. The contract is yours, and most of what decides classification is yours to set. All eight signals are further down this page.
Are you working with
them legally?
Tick what’s true of your arrangement. There’s no pass mark: four authorities look at these same facts, each by its own test, and no number of ticks is safe. Passing one is no defence to another, so aim for fewer.
You set their working hours, or their time off needs your approval
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You direct how the work is done, not just what is delivered
You buy or reimburse the hardware and tools they work with
You pay a fixed monthly sum rather than against invoices for defined deliverables
You hired them for work your own company sells
They sit inside your structure, with a manager, reviews and team rituals
Your contract prevents other clients, or you are effectively their only client
Your contract doesn’t let them subcontract the work on their own responsibility
Over the 75% line. They can now qualify as a TRADE — if they also have no employees, use their own equipment and work differently from your staff. Same tax either way, but a TRADE contract has to be written and registered with the SEPE, and the duty to tell you sits with them.
Three things to check
before you agree a rate
Which state they file in, what their W-9 says, and whether the rate they quoted already carries their tax. All three change the number that matters to them.
Which state they file in
The state line alone can cost 13.3% of the invoice, and it decides which test judges you. California and Massachusetts are the hard ones. Ask for tax residence; a bank address proves nothing.
What their W-9 says on line 3a
Line 3a is the one that matters. An LLC without a corporate election is reportable; an S-corp or C-corp generally is not. Get it before the first payment; a missing number costs 24% if you file.
Whether the rate carries their tax
They pay 15.3% self-employment tax on top of federal and state income tax, out of money you have already sent. A rate quoted without that allowance comes back in April.
The questions
The eight that come up most when companies hire in the US.
Can we hire a US contractor without a US entity?
Yes. A commercial agreement with an individual or their LLC needs nothing from you locally — no registration, no filing, no presence. You do not withhold either, so the whole invoice leaves your account. What you cannot do is run that arrangement like employment.
Do we have to file a 1099-NEC?
Only if your company is inside the US reporting system, and that turns on your own presence in the US. Section 6041 puts the duty on anyone engaged in a trade or business, and the regulation that exempts foreign payers, Treas. Reg. §1.6041-4(a)(2), only covers foreign-source income paid and received outside the US. Work performed in the US is US-source, so a company with a US branch, subsidiary or permanent establishment is generally in, and one without any of those generally is not.
Should our US contractor sign a W-9 or a W-8BEN?
A W-9, always. The W-8 series is for non-US persons and has no application to a contractor who is a US citizen, green card holder or resident. A lot of published guidance gets this backwards because it was written for US companies hiring abroad, which is the opposite arrangement. If a US-based contractor hands you a W-8BEN, something is wrong.
What is the $2,000 figure our accountant mentioned?
The 1099 reporting threshold. It sat at $600 from 1954 until the One Big Beautiful Bill Act raised it under §70433, effective for payments made after 31 December 2025. From 2027 it moves with inflation, using 2025 as the base year and rounding to the nearest $100. The 1099-K threshold is a separate number entirely: $20,000 and more than 200 transactions.
Which classification test actually applies to us?
More than one, and they disagree. The IRS asks about control, in three parts. The Department of Labor applies an economic-reality test it stopped enforcing in May 2025, though the 2024 rule still governs private lawsuits and a rescission is pending. The labour board applies a third standard. California and Massachusetts are stricter again: the work itself has to fall outside your line of business. New Jersey runs the same test but also accepts work done away from your premises, which you have none of. Passing one is no defence to another.
Our contractor is in New York. Does that change our contract?
Probably. New York’s Freelance Isn’t Free Act has required a written contract and a payment date since 28 August 2024 for work worth $800 or more in any 120 days, with double damages for getting it wrong. It defines a hiring party as any person who retains a freelancer and carves out only governments, including foreign governments, not foreign companies. Whether it reaches a payer with no New York presence has not been settled on appeal. Illinois and California have their own versions, at $500 and $250.
Can a US contractor create a taxable presence for us?
Only in specific circumstances, and they are avoidable. A genuinely independent contractor with several clients, working in the ordinary course of their own business, does not. The risk is the dependent agent: someone who habitually exercises authority to conclude contracts binding on your company. Whether treaty protection is available depends on whether your country has a US tax treaty, and several do not.
Do we need to check they are allowed to work in the US?
Do we need to check they are allowed to work in the US?
Not the way an employer does. Form I-9 applies to employees, and the E-Verify guidance is explicit that it is not required for independent contractors. Federal law does prohibit knowingly engaging someone unauthorised, so the position is that you do not verify and you also do not deliberately look away. Using contractor status to sidestep I-9 obligations is itself a violation.
Not the way an employer does. Form I-9 applies to employees, and the E-Verify guidance is explicit that it is not required for independent contractors. Federal law does prohibit knowingly engaging someone unauthorised, so the position is that you do not verify and you also do not deliberately look away. Using contractor status to sidestep I-9 obligations is itself a violation.
General information only, not tax, legal or accounting advice. Figures reflect rules in force in 2026 and the assumptions stated beside each calculation. The $2,000 threshold is IRC §6041(a) as amended by OBBBA §70433, applies to payments after 31 December 2025 and is indexed from 2027; the 24% backup withholding rate under IRC §3406 attaches at the same line. Federal figures are tax year 2026. State figures are the latest published, tax year 2025, because California and New York set their thresholds in the autumn. The flat-rate tab is modelled on Michigan at 4.25%, after a personal exemption taken here as $5,700, on which sources differ. Local income tax below state level is not modelled anywhere on this page. The Department of Labor’s contractor rule is under pending rulemaking, RIN 1235-AA46: the 2024 rule still governs private litigation, enforcement stopped in May 2025, and the proposed rescission was not final at the time of writing. Whether a foreign payer with no US trade or business has a Form 1099 obligation is a position rather than a settled rule. Classification, workers’ compensation, unemployment insurance and freelancer statutes are state law, and this page does not cover all fifty states. Confirm your position at irs.gov, dol.gov, or with a qualified US adviser.