If you pay both employees and contractors, are you charged payroll fees for both?

Summary

Usually yes, but only for the months you actually pay them. Gusto, Square, Patriot, and OnPay all bill a U.S. contractor at the same per-person rate as an employee in any month that contractor is paid. The tax side is where the two groups split: you withhold nothing and owe no employer taxes on a genuine contractor, and starting with 2026 payments, a contractor paid less than $2,000 in the year does not need a Form 1099-NEC.

The per-person fee, month by month

Picture a company with four employees and three contractors who invoice when they finish a job. At list prices, before any introductory discount:

Gusto Simple ($49 plus $6 per person): $91 in a month when all seven get paid, $73 when only the employees do. Gusto's pricing FAQ says it bills for contractors only "in months when you've paid them."
Square Payroll ($35 plus $6 per person paid): $77 or $59.
OnPay ($49 plus $6 for each employee or contractor included in at least one pay run in the billing period): $91 or $73.
Patriot Full Service ($37 plus $5 per worker paid during the month): $72 or $57.

Contractors abroad are billed differently at Gusto, with no monthly per-contractor fee, only a service fee and a foreign exchange fee on each payment.

A business with no W-2 employees yet has cheaper setups. Gusto's Contractor Only plan is $35 a month plus $6 per person, with the base at $0 for the first six months and 1099 creation and filing included. Square charges $6 per contractor paid with no base fee. QuickBooks Contractor Payments runs $25 a month for the first three months (50% off), covers 20 contractors, and adds $2 for each one after that.

The $2,000 line for Form 1099-NEC

For tax years beginning after 2025, the IRS reporting threshold for nonemployee compensation is $2,000, and it may be adjusted for inflation from 2027. The IRS notes that the old $600 figure had stood "for many decades." The same threshold now governs backup withholding on those payments, the 24% the payer holds back when, for example, a payee has not supplied a correct taxpayer identification number. Collecting that number is what Form W-9 is for.

In practice: a designer paid $500 in each of three months earns $1,500 for the year and gets no 1099-NEC. On Gusto Simple, that designer still adds $18 to the year's bill.

Filing costs vary once you do need 1099s. QuickBooks payroll plans include unlimited 1099-NEC and 1099-MISC e-filing. Patriot Basic charges $20 for one to five e-filed forms, $2 more for each form from 6 to 35, and caps at $80. Mailing paper copies costs $3 per worker per year at Square and $10 a form at OnPay, where downloading them yourself is free.

When the contractor label does not hold

The IRS looks at the substance of the relationship, not the name on the contract. Its three questions cover behavioral control (can the company direct how the job is done), financial control (who sets how the worker is paid, whether expenses are reimbursed, who supplies tools), and the type of relationship (benefits, permanence, and whether the work is a key part of the business). Anyone whose work you control in what gets done and how it gets done is your employee.

Publication 15-A spells out the cost of getting it wrong. Without a reasonable basis for treating an employee as a contractor, you are liable for that worker's employment taxes. Even with a reasonable basis, relief depends on having filed all required information returns consistently with how you treated the worker.

A business that wants to switch workers to employee status on its own can apply to the Voluntary Classification Settlement Program. It pays 10% of the employment tax liability on the most recent tax year's compensation for those workers, owes no interest or penalties on that amount, and faces no classification audit for prior years. Eligibility requires having treated the workers consistently as nonemployees, having filed the required 1099s for the previous three years, and not being under an IRS employment tax audit or a Labor Department or state classification audit. Form 8952 goes in at least 120 days before the date the business wants to start treating them as employees. Form SS-8 asks the IRS for a status ruling, but the IRS publishes no processing time and will not rule on hypothetical situations or proposed transactions.

Sources

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Written by Kaz, independent publisher. No commercial relationship with the companies named unless it is listed on the disclosure page.

Published September 27, 2026. The figures above come from the government and vendor pages listed under Sources.

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