Can Sole Proprietors Have 1099 Employees? W-9, 1099-NEC, and Penalties

Yes, a sole proprietor can hire and pay independent contractors, often called 1099 workers, without forming an LLC or any other business entity. What you do need to do is classify each worker correctly, collect a Form W-9 before you pay them, and file Form 1099-NEC by January 31 for anyone you paid $600 or more during the calendar year. Miss those steps and the IRS can pursue back taxes and penalties, even against a one-person business.

“1099 Employee” Is Not a Real Category

The phrase gets used constantly, but the IRS does not recognize it. A worker is either an employee or an independent contractor, and the label depends on how much control you have over how the work gets done. Get this wrong and the consequences fall on you as the payer, not on the worker.

The IRS looks at three areas of evidence under its common-law rules.¹ Behavioral control asks whether you direct when, where, and how the person works, including whether you train them or require specific methods. A real contractor decides how to get the job done.² Financial control asks who invests in tools, who can profit or lose money on the engagement, and whether the worker markets services to other clients. Type of relationship covers written contracts, whether you provide benefits, and whether the work is a permanent part of your operations or a short-term project with a clear end date.

No single factor decides the question. If a specific arrangement leaves you uncertain, either you or the worker can file Form SS-8 and ask the IRS for a formal determination of the worker’s status for federal employment tax purposes.³

One boundary worth knowing: some states apply a stricter “ABC test” that presumes a worker is an employee unless the hiring business proves the worker is free from control, performs work outside the business’s usual activities, and is independently established in the trade. A worker who qualifies as a contractor under the federal common-law rules can still be treated as an employee under state tax or labor law.

Collect a W-9 Before You Pay Anyone

Ask every contractor to complete Form W-9 before the first payment goes out. The form gives you the contractor’s legal name, business name if any, address, tax classification, and taxpayer identification number, which is either a Social Security Number or an Employer Identification Number.⁴ The current version is on the IRS website.⁵

If a contractor refuses or fails to give you a valid taxpayer identification number, you have to withhold 24 percent of each payment and send it to the IRS as backup withholding. That obligation continues until you get a correct number.⁴

Keep every completed W-9 with your payment records. The IRS requires employment tax records to be kept for at least four years after the tax becomes due or is paid, whichever is later.⁶

When You Don’t Have to File a 1099-NEC

Not every payment triggers a filing. Three situations let you skip Form 1099-NEC:

Total payments to the contractor for the year came to less than $600.⁷
You paid a corporation, including an LLC that is taxed as a C corporation or S corporation. Legal services are the main exception: attorney fees get reported regardless of the firm’s corporate structure.⁸
You paid by credit card, debit card, PayPal, Venmo, or a similar payment processor. The payment settlement entity reports that income on Form 1099-K, so you do not report it again on a 1099-NEC.⁸

The W-9 tells you the contractor’s tax classification. If it shows an LLC taxed as a C or S corporation and the work is not legal services, no filing is needed.

Filing Form 1099-NEC

Once your payments to any single contractor reach $600 or more for the year, you file Form 1099-NEC. Both the contractor’s copy and the IRS copy are due by January 31 of the following year. There is no automatic extension for this form.⁸

If you file 10 or more information returns of any kind during the year, counting all 1099s, W-2s, and other forms together, you must file electronically.⁹ The IRS runs a free portal for this called the Information Returns Intake System (IRIS). It is open to smaller filers too and is usually faster than paper.⁸ If you do file on paper, include Form 1096 as a transmittal summary listing the 1099s you are sending in.

Penalties for Late or Missing Filings

For returns due in 2026, the IRS penalties per form are tiered by how late the filing is:¹⁰

Up to 30 days late: $60 per form.
31 days late through August 1: $130 per form.
After August 1 or never filed: $340 per form.
Intentional disregard: $680 per form with no maximum cap.

A separate set of penalties applies to the payee statement, meaning the copy that goes to the contractor. Missing both deadlines can produce two penalties for the same form.¹⁰

What Happens if You Misclassify a Worker

If the IRS decides that someone you treated as a contractor was actually an employee, you owe the employment taxes you should have withheld and paid, including federal income tax withholding, Social Security, and Medicare. Federal law provides reduced liability rates when the misclassification was not intentional: 1.5 percent of wages for income tax withholding and 20 percent of the employee’s share of Social Security and Medicare taxes.¹¹

Those reduced rates double, to 3 percent and 40 percent, if you also failed to file the required 1099-NEC forms for the workers involved.¹¹ If the IRS finds intentional disregard of the classification rules, the reduced rates do not apply at all and you owe the full unpaid amount plus interest and penalties.¹

Fixing It Through the Voluntary Classification Settlement Program

If you realize you have been misclassifying workers and want to move them to employee status going forward, the IRS offers the Voluntary Classification Settlement Program. You apply with Form 8952 and agree to treat the affected workers as employees for future tax periods. In exchange, you pay 10 percent of one year’s employment tax liability calculated at the reduced Section 3509 rates, with no interest, no penalties, and no audit of prior years.¹²

To qualify, you must have consistently treated the workers as contractors, filed all required 1099s for them over the past three years, and not currently be under an IRS or Department of Labor employment tax audit. Submit Form 8952 at least 120 days before you plan to start treating the workers as employees.¹²

Foreign Contractors Are Different

If the contractor lives outside the United States and is not a U.S. person, you do not use Form W-9 or Form 1099-NEC. You collect Form W-8BEN, on which the contractor certifies their foreign status.¹³ Without a tax treaty benefit, you may have to withhold 30 percent of certain payments and send it to the IRS. For a foreign contractor who does all the work outside the United States, the W-8BEN is your primary documentation for the arrangement.

Put the Arrangement in Writing

A written contract is not required to hire someone as an independent contractor, but it strengthens your position if the classification is ever challenged. A clear agreement supports the “type of relationship” factor the IRS weighs, showing that both sides intended a contractor arrangement rather than employment.

At a minimum, cover the scope of work, payment terms, the expected timeline, and a statement that the contractor is responsible for their own taxes and insurance. If the contractor will see sensitive information, add a confidentiality clause. For creative or technical work, add language assigning ownership of the work product and any intellectual property to your business; without it, the contractor may keep rights to what they create.

1
Internal Revenue Service. Independent Contractor (Self-Employed) or Employee?
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Internal Revenue Service. Behavioral Control
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Internal Revenue Service. Instructions for Form SS-8
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Internal Revenue Service. Form W-9 (Rev. March 2024)
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Internal Revenue Service. About Form W-9, Request for Taxpayer Identification Number and Certification
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Internal Revenue Service. Topic No. 305, Recordkeeping
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Internal Revenue Service. Am I Required to File a Form 1099 or Other Information Return?
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Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC
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Internal Revenue Service. Filing Information Returns Electronically (FIRE)
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Internal Revenue Service. Information Return Penalties
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Office of the Law Revision Counsel. 26 USC 3509 – Determination of Employer’s Liability for Certain Employment Taxes
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Internal Revenue Service. Voluntary Classification Settlement Program
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Internal Revenue Service. About Form W-8 BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)