Almost 15% of the US workforce consists of independent contractors, which means that small businesses have a lot of talent to tap into, from freelance writing to consulting, without having to bring on full-time employees. But when hiring freelancers and gig workers, don’t be surprised to get this advice over and over: ‘Don’t forget to 1099 them.’ So what exactly does that mean? And how do you make sure you’re following IRS rules correctly when it comes to payroll for contractors?
What you’ll learn
What you’ll learn
Key takeaways
- You must issue a 1099-NEC to every independent contractor who you paid $600 or more for their services during the year, but you can issue them regardless of payment amount
- Ensure that you have every contractor complete a Form W-9 prior to starting work to make sure that you have their correct tax information on file
- Make sure you send 1099s to contractors by the January 31st deadline each year
- Form 1099-NEC is used for payments for services, while 1099-MISC is used for other miscellaneous payments like rent or royalties
This guide covers everything you need to know about issuing 1099s, from figuring out who qualifies to choosing the right form to avoiding common mistakes. Also see our video below on how how to pay contractors using 1099s.
What is a 1099 form?
A 1099 is a record of payments made to someone who isn’t your employee. It serves two purposes:
- It tells the IRS how much you paid the contractor.
- It gives the contractor a copy so they can accurately report the income on their tax return.
There are several types of 1099s, but business owners typically only need to know two:
- 1099-NEC: Used for nonemployee compensation (services provided by contractors).
- 1099-MISC: Used for other types of payments like rent, royalties, attorney fees, prizes, and certain medical payments.
Now that you understand the basics, let’s address one of the most common questions small business owners have when it comes to this paperwork.
Can I give someone a 1099 if I paid them cash?
Yes, you can – and if you paid the $600 or more in cash, you’re required to! The IRS rules state that you must report payments made to independent contractors regardless of the payment method. Whether you paid by check, bank transfer, credit card, or cash, if the total for services rendered meets or exceeds the $600 threshold in a year ($2,000 for 2026 and onward), you must issue them a 1099-NEC or 1099-MISC.
— David Kindness, CPA and OnPay contributor
Remember, 1099s do not differentiate between payment methods as their purpose is solely to document the total amount of income the contractor received from your business.
When paying in cash, keep these best practices in mind:
- Maintain detailed records: Keep invoices, receipts, and payment logs for every cash transaction.
- Substantiate your reporting: These records protect you in case of IRS inquiries or audits.
- Remember the contractor’s responsibility: Contractors must report all income (including cash payments) on their tax return, making accurate 1099s important for everyone involved.
Employee or independent contractor
The first step is knowing whether someone is an employee or an independent contractor. Employees always receive a W-2 at year-end, not a 1099. Independent contractors may require a 1099 if certain thresholds are met. So what does Uncle Sam have to say?
The IRS looks at three main factors to decide if a worker is an employee or an independent contractor:
1. Behavioral control – Do you direct how and when the work gets done (employee), or do they control their own schedule (contractor)?
2. Financial control – Do you cover the worker’s expenses (employee), or do they cover their own expenses and risk profit or loss (contractor)?
3. Relationship type – Is this an ongoing role with benefits (employee), or a project-based arrangement (contractor)?
Misclassifying workers can lead to penalties, so it’s important to get this right.
Who needs a 1099?
Not every contractor needs to get one. Here’s what to know:
- $600 threshold: If you paid an independent contractor $600 or more in a calendar year, you are required to issue a 1099-NEC. Starting in 2026, that threshold increases to $2,000.
- Corporations: Most incorporated businesses don’t require a 1099, except for attorneys and certain medical providers.
- Goods vs. services: Payments for goods (like office supplies) don’t require a 1099. Payments for services (like installation, consulting, or design work) usually do.
Since this can be a lot to keep track of, the table below is designed to help you keep the differences in mind.
| Form | When to use | Examples |
| 1099-NEC | Payments to independent contractors for services | Freelancers, consultants, designers, contractors |
| 1099-MISC | Miscellaneous payments not tied to contractor services | Rent, royalties, prizes, attorney fees, medical payments |
Start with a W-9
Before you can complete a 1099 correctly, you’ll need some details about the contractor, including their legal name, business name (if any), address, and taxpayer identification number (SSN or EIN). That’s where Form W-9 comes into play.
When should a business request a W-9 from a contractor
“Collect a completed W-9 before work begins. It saves time at year-end and ensures you’re not left scrambling for information.”
What happens if a contractor doesn’t give you a W-9?
“If a contractor refuses to provide one, that’s a red flag and could be the sign it’s time to find someone else to work with.”
— Noel Lorenzana, CPA and OnPay contributor
Choosing the right form: NEC vs. MISC
The IRS simplified the rules a few years ago:
- Use Form 1099-NEC when you’re paying independent contractors for services.
Use Form 1099-MISC for rent, royalties, prizes, attorney fees, or certain medical payments.
Here’s the rule of thumb:
- Work was performed = 1099-NEC
- Other payments = 1099-MISC
Here’s another table to help keep this from getting too tricky.
| Situation | 1099 required? | Keep in mind |
| Independent contractor paid $600 or more in a year | Yes | Will increase to $2,000 in 2026 |
| Payment to an incorporated business (LLC taxed as a corporation) | No | Exceptions: attorney fees, certain medical providers |
| Payment for goods (supplies, materials) | No | Only applies to services |
| Payment for services (installations, consulting, design) | Yes | Unless exempt as a corporation |
How to fill out the forms
Form 1099-NEC
When filling out Form 1099-NEC, start by collecting all necessary information, including your information, the contractor’s information, amounts you’ve paid, and any withholdings:
- Enter your information in the ‘PAYER’S’ box. Enter your TIN (Taxpayer Identification Number).
- Enter the contractor’s information in the ‘RECIPIENT’S’ box. Enter the contractor’s TIN.
- Box 1: Total amount paid to the contractor during the year.
- Box 2: Direct sales checkbox (rarely used by most businesses).
- Box 4: Federal income tax withheld (only if backup withholding applied).
- State tax section: Complete if applicable.
Form 1099-MISC
Just like with Form 1099-NEC, collect all payer info (your info) and all recipient info (contractor info), as well as all payments and withholdings, before filling out the form. You’ll usually only use a few boxes:
- Enter your information in the ‘PAYER’S’ box. Enter your TIN (Taxpayer Identification Number).
- Enter the contractor’s information in the ‘RECIPIENT’S’ box. Enter the contractor’s TIN.
- Box 1: Enter the total payments you made for rent.
- Box 2: Enter the total royalties you paid to the recipient during the year.
- Box 3: Enter any other income you paid to the recipient.
- Box 10: Enter all attorney fees you paid to the recipient.
The key is placing each payment in the correct category, whether that’s for services provided (1099-NEC) or for something else (1099-MISC).
Deadlines and filing details
The deadline for both forms is January 31 of each year. This gives the recipient time to file their own tax return with the information you provide on the 1099s. By this date, you must:
- Send Copy B to the contractor.
- File Copy A with the IRS.
- File Form 1096, “Annual Summary and Transmittal of US Information Returns” with the IRS, which summarizes all 1099s you filed for the year.
A few more important things to note:
- Copy A (the IRS’s copy) must be filled out using the IRS’s official scannable red-ink version. You can order these from the IRS or file electronically.
- Copy B (the contractor’s copy) can be printed on regular paper.
- Late filings can result in penalties, so don’t wait until the last minute.
“If time, cost and flexibility are important to how your business manages payroll, then OnPay is the clear choice! They give me the flexibility to do payroll the way I need to, does not charge per pay-run (many competitors do) and I can easily onboard both team members that are 1099 contractors and/or W-2 employees.”
— David Bradley, QPilot
Common mistakes to avoid
Many business owners end up in hot water with 1099s, but most of the time, the issues are avoidable. Below are some issues to avoid.
- Waiting until January to request W-9s.
- Sending the wrong copy of the form to the IRS.
- Reporting payments for goods instead of services.
- Forgetting the corporate exception.
- Missing the $600 threshold ($2,000 as of 2026) by not tracking total payments throughout the year.
What happens after you send 1099s
Once the forms are sent, the contractor will use their copy to file their tax return. The IRS matches what you reported against what the contractor reports. If there’s a discrepancy, the IRS will follow up with the contractor — not you. Still, accuracy matters to avoid creating issues. Keep copies of all 1099s with your tax records for at least three years (but seven years is safer).
Bottom line: Businesses should understand how to 1099 someone
Small businesses that are looking for project assistance have a large talent pool to pick from, should they decide to go the contractor route. That said, knowing the ins and outs of 1099 forms and when to issue them is something anyone seeking contractor help should have on their to-do list.
Issuing 1099s might seem complicated, but once you know the rules, the process is straightforward. When in doubt, check with a tax professional. Staying compliant with 1099s protects your business and helps keep contractor relationships running smoothly.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.