# Pay Records for Contractors and the Self-Employed > How contractors and self-employed people differ from W-2 employees, the basics of Form 1099-NEC and self-employment tax, and how to keep clear records of pay. Source: https://www.paystubnest.com/guides/contractors-and-self-employed-pay-records Published: 2026-09-25 Publisher: PayStubNest.com ## Short answer Employees receive W-2 wages with taxes withheld; independent contractors are generally paid in full, may receive Form 1099-NEC, and handle their own taxes. Self-employed people usually owe self-employment tax of 15.3% (12.4% Social Security, 2.9% Medicare) on 92.35% of net earnings if those earnings are $400 or more, and should keep records of every payment received. If you work as an independent contractor, freelancer or sole proprietor, nobody runs payroll for you. That makes your own records more important, not less. This guide covers the W-2 vs 1099 distinction, the basics of self-employment tax and how to keep pay records that hold up. ## W-2 employee vs 1099 contractor **Employees** are paid wages. The employer withholds federal income tax, Social Security and Medicare, pays the employer's share of FICA, and reports it all on Form W-2 after the year ends. **Independent contractors** are in business for themselves. The client generally pays the full invoice amount with no tax withheld, and the contractor is responsible for their own income tax and self-employment tax. Which one a worker is depends on the actual relationship, not on what the contract calls it. The IRS looks at behavioral control, financial control and the relationship of the parties. See [IRS: Independent contractor (self-employed) or employee?](https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee) If you are unsure, a tax professional can help. ## Form 1099-NEC basics Businesses that pay a non-employee for services in the course of their trade or business report those payments on Form 1099-NEC once they reach a yearly threshold. For payments made after December 31, 2025, that threshold is **$2,000** in a calendar year, up from the long-standing $600, according to the [IRS instructions for Forms 1099-MISC and 1099-NEC](https://www.irs.gov/instructions/i1099mec). The threshold is scheduled to be adjusted for inflation after 2026. Two points matter for contractors: - All self-employment income is taxable, whether or not you receive a 1099 for it. - Your own records should reconcile to any 1099s you receive. If a client's form looks wrong, contact them early. ## Self-employment tax overview Self-employment tax is how self-employed people pay into Social Security and Medicare. Because there is no employer, you pay both halves. According to the [IRS](https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes): - The rate is **15.3%**: 12.4% for Social Security and 2.9% for Medicare. - It applies to **92.35%** of net earnings from self-employment. - You generally owe it if net earnings from self-employment are **$400 or more**. - The Social Security part applies only up to the annual wage base, which is $184,500 for 2026 per the [Social Security Administration](https://www.ssa.gov/oact/cola/cbb.html), counting any W-2 wages too. The Medicare part has no cap, and an additional 0.9% Medicare tax can apply at higher incomes. - You can generally deduct half of your self-employment tax when figuring adjusted gross income. ### Example For example, a freelancer with $10,000 of net profit for the year (income minus business expenses) would figure: 1. $10,000 x 92.35% = $9,235 2. $9,235 x 15.3% = about **$1,413** in self-employment tax That is in addition to income tax. Since no one withholds it, many self-employed people make quarterly estimated tax payments. The IRS explains who needs to and how on its estimated taxes pages. For comparison, see how employees pay the same taxes in [our FICA guide](https://www.paystubnest.com/guides/social-security-and-medicare-fica). ## What pay records to keep Good records make taxes, budgeting and client disputes easier. Keep: - **Invoices** you issued, with dates, client names, services and amounts. - **Payment records**: bank deposits, payment app statements and checks, matched to invoices. - **Forms 1099** you receive. - **Business expense receipts**, since net profit, not gross receipts, drives self-employment tax. - **Estimated tax payment confirmations.** The IRS explains how long to keep tax records in [How long should I keep records?](https://www.irs.gov/businesses/small-businesses-self-employed/how-long-should-i-keep-records) The general period is tied to how long the return can be examined, with longer periods in some situations. ## Summarizing your own pay Some self-employed people like a regular summary of what they were paid, in the same format as a pay stub: the period, the amount received, and running year-to-date totals. It can help with budgeting and bookkeeping. Keep in mind: - A summary must reflect payments you actually received, with the real dates and amounts, and should match your deposits and invoices. - Payroll-style withholding lines do not apply to contractor payments, because nothing was withheld. Set aside tax money separately. - If you pay yourself through a corporation, that pay may be W-2 wages with real withholding; see [pay stubs for small business owners](https://www.paystubnest.com/guides/pay-stubs-for-small-business-owners). ## If you hire contractors Businesses that pay contractors should collect a Form W-9 before paying, track payments per contractor through the year, and file 1099-NEC where required. Keep classification decisions documented. ## Getting started If you have employees, or you are paid as an employee of your own corporation, you can [create a pay stub](https://www.paystubnest.com/app/new) in PayStubNest with withholding and [YTD totals](https://www.paystubnest.com/guides/year-to-date-totals-on-a-pay-stub) calculated for you. For broader background, read [gross pay vs net pay](https://www.paystubnest.com/guides/gross-pay-vs-net-pay), and see the [FAQ](https://www.paystubnest.com/faq) for product questions. For anything specific to your taxes, talk to a tax professional.