- You do not get to choose. If you control how, when and where the work is done, the helper is probably an employee.
- An employee costs you the employer's 7.65% for Social Security and Medicare, federal unemployment tax, and your state's taxes and workers' comp.
- A real contractor runs their own business: their own tools, their own customers, their own schedule, and gives you a W-9.
The IRS's three questions
The IRS looks at the whole relationship and groups the facts into three areas:
- Behavioral: does your business control, or have the right to control, what the worker does and how they do the job?
- Financial: do you control the business side of the job, such as how the worker is paid, whether expenses are paid back, and who provides tools and supplies?
- Type of relationship: is there a written contract or employee benefits, will the work continue, and is it a key part of your business?
No single answer decides it. A helper who works your hours, rides in your truck, uses your tools and does what you say on your jobs looks like an employee, whatever the paperwork says. If it is still unclear, either of you can file Form SS-8 and the IRS will decide; the IRS says that can take at least six months.
Two examples
Likely an employee: a helper who shows up at your shop at 7, rides with you, carries your ladder, works the jobs you sell, and is paid by the hour every week.
Likely a contractor: a licensed drywall finisher with their own business, insurance and tools, who quotes you a price for a job, sets their own hours, and works for other contractors too.
Your state may use a stricter test than the IRS for unemployment insurance and workers' comp. Check with your state labor or workforce agency.
What an employee costs on top of wages
| Cost | Rate | Source |
|---|---|---|
| Employer Social Security | 6.2% of wages, up to $184,500 a person in 2026 | IRS Publication 15 |
| Employer Medicare | 1.45% of all wages | IRS Topic 751 |
| Federal unemployment (FUTA) | 6.0% of the first $7,000 of wages, or 0.6% with the full 5.4% state credit | IRS Topic 759 |
| State unemployment, workers' comp | Set by your state and your insurer | Your state and policy |
Example: a helper paid $40,000 in a year costs you $40,000 × 7.65% = $3,060 in employer Social Security and Medicare, plus $7,000 × 0.6% = $42 in federal unemployment if you get the full state credit, plus your state unemployment tax and workers' comp. Our labor rate calculator turns all of that into what you need to bill per hour.
The paperwork for each
For an employee:
- Form W-4 from the employee, so you know how much income tax to withhold.
- Form I-9, which every US employer completes for every hire to check identity and work authorization.
- Report the hire to your state's new hire registry, which every state has.
- Withhold and deposit taxes each payday, file quarterly returns, and give a W-2 after the year ends.
For a contractor:
- Form W-9 before the first payment, with their taxpayer ID.
- A short written agreement for the work and price, and a copy of their insurance certificate.
- Form 1099-NEC after the year ends if you paid them enough to require one. See W-9 and 1099-NEC deadlines.
Use our take-home pay calculator to see what an employee's paycheck looks like after withholding.
If you get it wrong
Paying an employee as a contractor can leave you owing the taxes you did not withhold or pay, plus penalties, and can cause trouble with your state's unemployment and workers' comp agencies. If a helper is in a gray area, get advice from a tax professional before the first paycheck, not after the first audit letter.
Sources
- IRS, Independent contractor (self-employed) or employee?, checked October 9, 2026
- IRS Publication 15 (2026), Employer's Tax Guide, checked October 9, 2026
- IRS Topic 751, Social Security and Medicare withholding rates, checked October 9, 2026
- IRS Topic 759, Form 940 and federal unemployment (FUTA) tax, checked October 9, 2026
- IRS, Hiring employees, checked October 9, 2026
- USCIS, Form I-9, checked October 9, 2026
Published September 12, 2024. This page is general information, not legal or tax advice. Rules change and differ by state and city, so confirm with the agency named before you act.