Every January, small business owners get a flurry of questions about 1099s ? specifically, who needs one, how to file them, and what happens if you miss the deadline. The 1099-NEC (Nonemployee Compensation) replaced the 1099-MISC for contractor payments starting in 2020, and the rules are stricter than many business owners realize.
What Is a 1099-NEC?
The 1099-NEC is an IRS information return that businesses use to report payments made to non-employees ? typically independent contractors, freelancers, and sole proprietors. When you pay a contractor $600 or more during the tax year for services, you’re generally required to send them a 1099-NEC by January 31.
The IRS also receives a copy. This is how they cross-check that contractors are reporting their income ? and it’s also how they catch businesses that pay contractors off the books.
Who Needs a 1099-NEC
You must file a 1099-NEC for any individual, sole proprietorship, partnership, or LLC taxed as a sole proprietor or partnership if you paid them $600 or more for services in the calendar year.
Services include: graphic design, IT work, cleaning, bookkeeping, legal services, consulting, construction labor, and any other service provided by a non-employee.
Who Does NOT Need a 1099-NEC
- Corporations (C-corps and S-corps) ? with exceptions for legal and medical payments
- Payments made via credit card, debit card, or PayPal (those are reported by the payment processor on Form 1099-K, not by you)
- Employees (they receive W-2s, not 1099s)
- Payments below $600 total for the year
The $600 Threshold: How It’s Calculated
The $600 threshold is cumulative across all payments in the calendar year. If you paid a contractor $200 in March, $150 in June, and $300 in October, the total is $650 ? and you owe a 1099-NEC. Track payments throughout the year, not just at year-end.
The January 31 Deadline
The 1099-NEC has a hard deadline of January 31 for both:
- Furnishing copies to recipients (the contractor)
- Filing with the IRS (electronically or by mail)
This is stricter than many other 1099 forms. There is no extended deadline for filing with the IRS. If you file electronically (required if you’re filing 10 or more forms), you submit through the IRS FIRE system or an authorized e-file service.
The W-9: Collect It Before You Pay
Before you pay any contractor, ask them to complete IRS Form W-9. The W-9 provides their legal name, address, taxpayer identification number (TIN ? either an SSN or EIN), and entity type (individual, LLC, corporation, etc.).
Collecting the W-9 upfront solves three problems:
- You have the information you need to prepare the 1099 in January
- You protect yourself with documentation showing you collected TIN information in good faith
- You learn early whether the contractor is a corporation (which usually doesn’t need a 1099-NEC)
If a contractor refuses to provide a W-9 and their TIN, you’re required to withhold 24% of payments as backup withholding and remit it to the IRS. This is called backup withholding and it’s rarely a pleasant conversation ? which is why collecting W-9s before the work starts is far better than chasing them in January.
How to File 1099-NECs
You have two options:
Option 1: Paper Filing (fewer than 10 forms)
Order the official IRS forms (not a photocopy ? the IRS requires the red-ink scannable version). You cannot just print from a PDF. Mail Copy A to the IRS with Form 1096 (a transmittal summary) and mail Copy B to the contractor.
Option 2: Electronic Filing (required for 10 or more forms)
Use an authorized e-file service: Track1099, Tax1099, Yearli, or your accounting software (QuickBooks, Gusto). These services handle the transmission to the IRS and allow you to email or mail copies to contractors. Cost is typically $1?3 per form.
Penalties for Late or Missing 1099s
The IRS penalty for not filing a correct 1099 is:
- $60 per form if filed within 30 days
- $120 per form if filed after 30 days but before August 1
- $310 per form if filed after August 1 or not filed at all
- Up to $630 per form for intentional disregard
For a business that uses contractors regularly, missing a dozen 1099s can mean $3,000?$7,000 in penalties. The forms are inexpensive to file ? the penalties are not.
1099-K vs. 1099-NEC: What’s the Difference?
If you paid a contractor through PayPal, Venmo for Business, Stripe, or a credit card, the payment processor may issue the contractor a 1099-K directly. You don’t file a 1099-NEC for those payments ? the 1099-K covers them. However, you should still collect a W-9 from every contractor to document their entity type and verify whether a 1099-NEC is needed for cash or check payments.
A January 1099 Checklist
- Pull all contractor payments from your books for the prior year
- Identify payments $600+ to non-corporations
- Verify you have W-9 forms on file with correct TINs
- File and distribute by January 31
- Keep copies for your records for at least 7 years
If you need help with your year-end 1099 filings or want to set up a contractor tracking system so January isn’t a scramble, book a free call with Luisa. She handles 1099 preparation and filing for small business clients nationwide.
