About 7.4% of the US workforce works as independent contractors, according to the Bureau of Labor Statistics. This means 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 follow 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 once you pay a contractor $2,000 or more in a year up from the $600 threshold that applied for 2025 and earlier
- The IRS finalized new versions of Form 1099-NEC and 1099-MISC with boxes for cash tips and overtime compensation, effective for the 2026 tax year
- If you file 10 or more information returns, including W-2s and 1099s, you must submit them electronically using the Information Returns Intake System (IRIS)
- Ensure every contractor completes a Form W-9 before work begins to avoid missing tax information at year-end
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 to pay contractors using 1099s.
2026 Form 1099-NEC and 1099-MISC: What changed
Here’s what’s different for the 2026 tax year:
- The reporting threshold for a 1099 to a nonemployee or vendor is now $2,000, up from $600, for payments made on or after January 1, 2026 (up from $600 for 2025 and prior)
- Both forms include new boxes (1b – 1d on the NEC; 13a – 14 on the MISC) to report cash tips, Treasury Tipped Occupation Codes (TTOC), and overtime compensation
- Standard nonemployee compensation on the NEC moved from Box 1 to Box 1a to accommodate these additions
- The payer’s name and address section is now broken into separate boxes to make the forms easier for optical character recognition (OCR) software to read
View the final versions here:
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, and if you paid $2,000 or more ($600 or more for 2025 and earlier), you’re required to. The IRS rules require you to report payments made to independent contractors and vendors, regardless of the payment method. Whether you paid by check, bank transfer, or cash, if the total for services rendered meets or exceeds the reporting threshold for the year, you must issue them a 1099-NEC or 1099-MISC.
— David Kindness, CPA and OnPay contributor
Remember, this applies to cash, check, and electronic funds transfer (EFT) payments, where you’re solely responsible for reporting the income. Payments made by credit card or through a third-party network like PayPal follow different rules, which we cover next.
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
Do I still need to issue a 1099 if I paid through PayPal or Venmo?
Not always, and it depends on how you made the payment. Payments to contractors by credit card, debit card, or through a third-party network like PayPal, Venmo, or Cash App are generally excluded from 1099-NEC and 1099-MISC reporting. Instead, the payment processor reports that income to the vendor and the IRS using Form 1099-K.
This exception applies even if the contractor never receives a 1099-K. Processors only have to issue one once a recipient exceeds $20,000 in gross payments and completes more than 200 transactions in a year. Many contractors paid through PayPal or Venmo fall well under that bar, so neither you nor the platform sends a form. However, the income is still fully taxable, and the contractor must report it.
A few things to keep in mind:
- Tag the payment correctly: The exception only applies to payments tagged as goods and services on a business account. Payments sent as friends and family don’t count toward the 1099-K threshold and can create confusion at tax time.
- Zelle is the exception to the exception: Zelle doesn’t settle funds the way PayPal and Venmo do, so it isn’t a third-party settlement organization and doesn’t issue 1099-Ks. If you pay a contractor $2,000 or more through Zelle, you should issue a 1099-NEC or 1099-MISC yourself.
- Track your payment methods: If you pay a contractor through a mix of methods, only count the cash, EFT, check, or Zelle portion toward your reporting threshold. Card and other third-party network payments don’t factor in.
Can I 1099 an employee?
You can’t issue a 1099 to an employee, as this form is strictly for nonemployees. Misclassifying an employee as a contractor to avoid taxes can lead to unwelcome attention in the form of IRS penalties.
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 need a 1099 if payments exceed the reporting threshold.
The IRS looks at three main factors to decide if a worker is an employee or an independent contractor:
- Behavioral control – Do you direct how and when the work gets done (employee), or do they control their own schedule (contractor)?
- Financial control – Do you cover the worker’s expenses (employee), or do they cover their own expenses and risk profit or loss (contractor)?
- Relationship type – Is this an ongoing role with benefits (employee), or a project-based arrangement (contractor)?
Getting this wrong can lead to back taxes, penalties, and unwelcome IRS attention, so take the time to classify workers correctly from the start.
Who needs a 1099?
Not every contractor needs to get one. Here’s what to know:
- $2,000 threshold: If you paid an independent contractor $2,000 or more in a calendar year, you are required to issue a 1099-NEC. This applies to payments made in 2026 and beyond. For 2025 and earlier, the threshold was $600 (with one exception, covered below).
- 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.
Do I need to 1099 an LLC or an S Corp?
“It depends on how the LLC is taxed, not on its status as an LLC. A single-member LLC taxed as a sole proprietorship, or a multi-member LLC taxed as a partnership, still needs a 1099 if you meet the threshold. Only an LLC that has elected S Corp or C Corp tax treatment gets the corporate exemption.”
— Janet Berry-Johnson, CPA and OnPay contributor
Generally, you don’t need to issue a 1099 to corporations (S Corps or C Corps). However, there’s a major exception: attorneys. You must always issue a 1099-NEC for legal fees paid to an attorney or law firm for services, even if they’re incorporated. The $2,000 reporting threshold applies. You report gross proceeds paid to an attorney, such as a settlement payment, on Form 1099-MISC, and the older $600 threshold applies.
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, attorney fees for services |
| 1099-MISC | Miscellaneous payments not tied to contractor services | Rent, royalties, prizes, gross proceeds paid to an attorney, medical payments |
Start with a W-9
Before you can complete a 1099 correctly, you 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, including attorney fees for legal services
- Use Form 1099-MISC for rent, royalties, prizes, gross proceeds paid to an attorney, 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 $2,000 or more in a year | Yes | $600 threshold applies for 2025 and earlier |
| 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
For a full walkthrough of each box on the finalized 2026 forms, see our complete guide to Form 1099-NEC and 1099-MISC instructions. Here’s a quick overview to get you started.
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 1a: Total amount paid to the contractor during the year.
- Box 2: Direct sales checkbox, used if you made $5,000 or more in direct sales of consumer products to the contractor for resale (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 any gross proceeds paid to an attorney, such as a settlement payment.
The key is placing each payment in the correct category, whether that’s for services provided (1099-NEC) or for something else (1099-MISC).
How to file electronically (IRIS Transition)
Beginning with the 2026 tax year, the IRS is retiring the old FIRE (File Information Returns Electronically) system. For the 2027 filing season, filers must submit all information returns through the Information Returns Intake System (IRIS).
- The 10-form rule: If you file 10 or more returns in aggregate (including W-2s and 1099s), you are now required to e-file.
- How IRIS works: Unlike the old system, IRIS lets you manually enter data for a few forms or upload a CSV file directly via a web portal.
- Getting started: You must apply for an IRIS Transmitter Control Code (TCC), which can take up to 45 days to process. It’s a good idea to make the change early to avoid the January 31 deadline rush.
To make this transition seamless, ensure you have the right payroll software features to automate the e-filing process.
Deadlines and filing details
The deadline for both forms is January 31 of each year.
When the 31st falls on a weekend, you have until the next business day. But don’t wait until the last minute. By January 31, 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, which summarizes all 1099s you filed for the year, with the IRS
A few more important things to note:
- You must use the IRS’s official scannable red-ink version for Copy A (the IRS’s copy). You can order these from the IRS or file electronically.
- You can print Copy B (the contractor’s copy) on regular paper.
- Late filings lead to IRS 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, issues are avoidable. Below are some common mistakes 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 $2,000 threshold ($600 for 2025 and earlier) by not tracking total payments throughout the year
If you realized you reported the wrong amount or incorrect contractor information after filing, you may need to issue a corrected 1099.
“One under-the-radar mistake is the ‘double reporting trap.’ Business owners often issue a 1099 even when payments were made through credit cards or third-party platforms like PayPal or Stripe, which may already have their own reporting requirements. Knowing which payment methods trigger 1099 reporting — and which don’t — is key to avoiding errors.”
— Marit Burmood, CPA, Enrolled Agent, Small Business Coach
What happens after you send 1099s
Once you send the forms, the contractor uses their copy to file their tax return. The IRS matches what you reported against what the contractor reports. If the contractor underreports their income, the IRS follows up with them directly. That said, accuracy on your end helps avoid issues. If the IRS finds a mismatch on your 1099s, they send a notice requiring you to correct it and possibly begin backup withholding.
Bottom line: Know how to 1099 someone
Small businesses that need project help have a large talent pool to draw from when they go the contractor route. Put knowing the ins and outs of 1099 forms, and when to issue them, on your to-do list before you bring in contractor help.
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 protects your business and keeps 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.