Marcus is paid $600 in cash for weekend driveway jobs and gets no tax form. Is the $600 taxable?

Yes. All income is taxable, form or not.

No. With no form, there's no tax to pay.

Only after his cash jobs pass $2,000 for the year.

Only if he deposits the cash in a bank.

Rosa's boss sets her hours, supplies the sealcoating rig and pays her by the hour all season, but hands her a 1099. What decides whether she's an employee?

How the work is set up: who controls it, who supplies the equipment and who takes the risk.

The 1099 she was handed, since the form sets her status.

Whether she signed a paper that calls her an independent contractor.

Whether her pay for the year passed $2,000.

Luis works 50 hours a week on a 1099. What overtime does federal law require for him?

None, because federal overtime law covers employees.

Time and a half for hours over 40.

Time and a half on weekends only.

In the lesson's example, about how much 1099 profit does it take to match $40,000 of W-2 pay after federal tax?

$40,000, because the pay is the same.

$38,000, because of the business deductions.

In the 50-hour week, both workers gross $1,100. About how much more does the 1099 worker pay in Social Security and Medicare that week?

About $71 more ($155 against $84).

Nothing more, since the pay is the same.

A business pays a contractor $1,500 during 2026. Must it send a 1099-NEC?

No, because the limit is $2,000 for 2026, but the $1,500 is still taxable.

Yes, because the limit is $600.

Only if the payment went through an app.

Only if the contractor asks for one.

Lesson P101.2 · Personal Finance 101: Get Control

W-2, 1099 or cash

7-minute read · Figures for tax year 2026

A blank Form 1040, U.S. Individual Income Tax Return — Photo: Kindel Media / Pexels, Pexels License

The short answer

A W-2 means you're an employee. Your employer takes taxes out of each check and pays half of your Social Security and Medicare, and you're usually covered by overtime law, workers' comp and unemployment insurance. A 1099 means you're paid as self-employed: nobody takes taxes out, you pay both halves of Social Security and Medicare, and those protections usually don't apply, though you can deduct business costs. Cash is taxable income either way.

W-2 and 1099 side by side

Pavement crews are often paid every way at once: W-2 wages in season, a 1099 for side jobs, cash for weekend driveways. Each one changes what you owe in April, how your overtime is paid, and what catches you if you're hurt in July or laid off in November.

What changes	W-2 employee	1099 contractor
Who takes taxes out	Your employer withholds income tax and your share of Social Security and Medicare	No one. You pay estimated tax yourself
Social Security and Medicare	You pay 6.2% Social Security on wages up to $184,500 (2026) plus 1.45% Medicare on all wages, and 0.9% more on wages over $200,000. Your employer matches the 6.2% and 1.45%	Once net earnings reach $400, you pay 15.3% self-employment tax on 92.35% of them, then deduct half
Overtime	At least time and a half over 40 hours in a workweek, if you're non-exempt	Not covered
Overtime deduction, 2025–2028	Up to $12,500 of the overtime premium ($25,000 joint)	Not available
Hurt on the job	Workers' comp usually applies	Usually no workers' comp
Laid off between seasons	Usually eligible for unemployment, under your state's rules	Usually not. 1099 earnings generally don't count
Business costs	Not deductible	Deductible, plus a qualified business income deduction of up to 20%
Form you get	A W-2	A 1099-NEC if a business paid you $2,000 or more in 2026 ($600 for 2025 and earlier)

The same pay, two ways

Example numbers only. They are not a pay guide.

Single filer, tax year 2026	W-2 employee	1099 contractor
Wages or net profit	$40,000	$40,000
Social Security and Medicare	$3,060	$5,652
Federal income tax	$2,620	$1,775
Total federal tax	$5,680	$7,427
Left after federal tax	$34,320	$32,573

To match the W-2 job after federal tax, the 1099 worker needs about $42,270 of profit, 5.7% more. That's before counting overtime, workers' comp, unemployment insurance, or any health plan or retirement match the W-2 job carries. The example assumes the 2026 standard deduction of $16,100, no other income and no credits. The 1099 column includes the deduction for half of self-employment tax and the qualified business income deduction. State tax isn't included.

The overtime week works the same way. At 50 hours, $20 an hour on a W-2 pays $1,100: 40 hours at $20 plus 10 at $30. At $22 an hour flat on a 1099, the same 50 hours also pays $1,100. The 1099 worker pays about $71 more that week in Social Security and Medicare ($155 against $84). Through 2028, the W-2 worker can also deduct the $100 overtime premium from federal taxable income (lesson P101.3 shows how).

Who decides if you're a contractor

The working relationship decides it, whatever form you're handed. The IRS weighs three kinds of evidence:

Behavioral control: who decides how, when and where the work gets done.
Financial control: who supplies the truck, the sealer and the equipment, and who can make or lose money on the job.
The type of relationship: an ongoing job, benefits, a written contract.

A boss who sets your hours, hands you the equipment, pays by the hour and keeps you all season points toward employee status. A homeowner who hires you for one driveway, done with your own rig at your own price, points toward contractor.

If you think you've been classified wrong, start by asking the person who pays you. If that doesn't settle it, either of you can ask the IRS to decide on Form SS-8. In qualifying cases, a worker treated as a contractor uses Form 8919 to pay only the employee share of Social Security and Medicare. Your state labor department handles state law and unemployment, and the U.S. Labor Department handles federal overtime.

The federal labor test is in flux. The Labor Department stopped using its 2024 rule in its own enforcement on May 1, 2025, proposed a new one on February 26, 2026, and hadn't finalized it as of October 10, 2026. Your state may use a stricter test.

Paid in cash or on a 1099: report it and set tax aside

Cash is taxable even when no form arrives. The IRS says all income must be reported, cash included. If you're really an employee, your employer still owes payroll taxes and a W-2, cash or not. If you work for yourself, you report the income on Schedule C and pay self-employment tax.

Unreported cash costs you later. It earns no Social Security credits: in 2026 a credit takes $1,890 of reported earnings, you can earn up to 4 a year, and retirement benefits take 40. It can't prove your income for an apartment, a car loan or a mortgage, and Fannie Mae generally wants two years of self-employment history. Deposit cash in your bank account and keep a simple log of who paid you, when and for what.

How much to set aside: estimate your own share with the W-2 vs 1099 take-home calculator or a tax pro. In the example, federal tax alone came to about 19% of $40,000 of profit ($7,427); add your state's income tax and round up. Then move that share of every payment into a separate tax account the day it lands.

For 2026 income, estimated payments are due April 15, June 15 and September 15, 2026, and January 15, 2027.
You generally must pay estimates if you'll owe $1,000 or more after withholding and credits.
You generally avoid an underpayment penalty by paying the smaller of 90% of this year's tax or 100% of last year's (110% if last year's AGI was over $150,000).

Your Move

Do this week

Look at your last pay stub or payment. Taxes taken out means W-2. Nothing taken out means you're paid as a 1099 contractor or in cash.
W-2: if last year brought a big tax bill or a big refund, run the IRS Tax Withholding Estimator and update your W-4.
1099 or cash: open a savings account named "Taxes," move your set-aside from every payment the day it lands, and put the four estimated tax dates in your phone.
Everyone: open my Social Security and check that last year's earnings are there.

Log it: Tax set-aside or W-4 checked.

Common questions

Is 1099 better than W-2?

Neither always is. A 1099 rate has to be higher to come out even, because you pay both halves of Social Security and Medicare and lose overtime, workers' comp and unemployment coverage. In the example, it takes about $42,270 of 1099 profit to match $40,000 of W-2 pay after federal tax.

I got a 1099 for less than $2,000, or none at all. Do I still report the income?

Yes. The $2,000 rule only decides when a business must send the form. All of the income is taxable.

When should my W-2 or 1099 arrive?

Businesses must send 2026 forms by Monday, February 1, 2027, because January 31 falls on a Sunday.

Watch out for

"No taxes taken out" doesn't mean "no taxes owed."
The IRS's 2026 Dirty Dozen list warns about ghost preparers who won't sign your return, bogus "Self-Employment Tax Credit" promotions, and inflated withholding claims on W-2s and 1099s.
Payment apps must send a Form 1099-K above $20,000 and more than 200 transactions in a year, and some states set a lower bar. Below that, the income is still taxable.

Free help

IRS Tax Withholding Estimator, to check your W-4.
VITA: free tax preparation for moderate incomes. The IRS page lists about $70,244 or less, and sites set their own limits.
IRS Free File, for AGI of $89,000 or less in the 2026 filing season.
my Social Security, to check your earnings record.
IRS: employee or contractor? and Form SS-8.
Labor Department overtime fact sheet.

Free practice

Lesson check

5 questions on this lesson, one at a time, with the answer and the reason after each. Pass with 4 right, including every must-know question.

This is general education, not tax, legal, investment or insurance advice. Rules change and every situation is different. Check the sources below, and talk to a qualified professional before you act on it.

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