How to Hire a 1099 Employee: Forms, Filing, and Records

There is no such thing as a “1099 employee” — the label is shorthand for an independent contractor, and hiring one correctly means treating them as an outside business rather than a member of your staff. To hire a 1099 independent contractor, confirm the worker genuinely qualifies as a contractor under IRS rules, collect a completed Form W-9 and a written agreement before you pay anything, and file Form 1099-NEC by January 31 of the following year for any contractor you paid $2,000 or more during 2026.¹ The reporting threshold recently doubled from the longstanding $600 level, but the classification rules that decide whether someone is a contractor at all have not changed.

Confirm the Worker Actually Qualifies as a Contractor

Before you sign anything, make sure the arrangement you have in mind will hold up. The IRS uses common-law rules grouped into three categories, and no single factor decides the question. Its examiners look at the whole relationship and weigh the evidence together.²

Behavioral control. Does your company direct how the work gets done — specifying tools, methods, schedules, or the sequence of steps? Detailed direction points toward employment even when the worker has some day-to-day freedom.
Financial control. Does the worker invest in their own equipment, market services to multiple clients, and stand to profit or lose money based on how they run the work? Someone who depends on your company for all their income and has no real business expenses starts to look like an employee.
Type of relationship. Do you provide benefits like health insurance, vacation, or a pension? Is the engagement open-ended or tied to a specific project? Work that is a core part of your regular operations, rather than a specialized side project, points toward employment.³

If you genuinely cannot tell, either you or the worker can file Form SS-8 to ask the IRS for an official determination.⁴ The review takes months, so it is a planning tool, not a quick answer.

The IRS Test Is Not the Only Test

Passing the IRS test does not automatically settle the question everywhere else. The Department of Labor applies its own six-factor “economic reality” test under the Fair Labor Standards Act, in a final rule effective March 2024, to decide whether the worker is entitled to minimum wage and overtime.⁵ Many states apply a stricter ABC test for unemployment insurance, workers’ compensation, and state wage laws, which presumes employment unless the hiring company proves the worker is free from its control, performs work outside the company’s usual business, and is independently engaged in that trade. A freelance graphic designer hired by a marketing agency, for example, might satisfy the IRS test but fail the ABC test because design work sits squarely within the agency’s usual course of business. Check the rules in every state where the contractor will actually perform work before you engage them.

Collect the Paperwork Before the First Payment

Form W-9

Before you cut a check, ask the contractor to complete and return IRS Form W-9. The form captures their legal name (or business name), address, taxpayer identification number, and entity type. An individual typically provides a Social Security Number; a business entity provides an Employer Identification Number; a sole proprietor with an EIN can use either.⁶ If the contractor does not return a W-9, you are required to withhold 24% of every payment as backup withholding and remit it to the IRS.⁷

The entity type on the W-9 matters because it affects whether you have a 1099 reporting obligation at all. Payments to a C corporation or S corporation generally do not require a 1099-NEC, with one important exception covered below.

Written Contract

The IRS does not technically require a written agreement, but skipping one invites problems. A contractor agreement should spell out the scope of work, payment terms, project timeline, and a clear statement that the worker is an independent contractor responsible for their own taxes and business expenses. The contract cannot override the actual facts of the relationship — if you control the work like an employer, calling the worker a contractor on paper will not save you — but it documents the parties’ intent, which the IRS treats as one factor in classification.

Foreign Contractors

If the worker is not a U.S. person, collect Form W-8BEN instead of a W-9.⁸ The default federal withholding rate on payments to foreign persons is 30%, though a tax treaty between the U.S. and the contractor’s home country may reduce or eliminate that obligation. You do not file a 1099-NEC for a foreign contractor who performed all work outside the United States; instead, you may need to file Form 1042-S. Foreign contractor payments generate large penalties when handled wrong, so this is a spot where professional tax advice pays for itself quickly.

Insurance

Independent contractors are not covered by your workers’ compensation policy or general liability insurance. Requiring contractors to carry their own general liability and, where relevant, professional liability coverage — and collecting a certificate of insurance before work begins — keeps that risk with the person doing the work. An uninsured contractor who causes a serious injury can still pull your company into the resulting lawsuit regardless of what the contract says.

File Form 1099-NEC for the Payments You Made

For the 2026 tax year, you must file Form 1099-NEC for each contractor you paid $2,000 or more during the calendar year in the course of your trade or business.¹ The threshold, which had been $600 since the form’s inception, was raised by federal legislation effective for payments made after December 31, 2025, and will adjust for inflation starting in 2027. You must also file a 1099-NEC for any contractor from whose payments you withheld federal income tax under backup withholding rules, regardless of the total amount paid.⁹

The name and taxpayer identification number on the 1099-NEC must match exactly what the contractor put on the W-9. Discrepancies trigger IRS notices and can force you into backup withholding on future payments. Verifying the TIN through the IRS TIN Matching Program before the first payment saves a lot of downstream correction work.

Deadline

The filing deadline is January 31 of the year following payment, both for the copy sent to the IRS and the copy furnished to the contractor.⁹ There is no automatic extension for 1099-NEC. For the 2026 tax year, the deadline is January 31, 2027.

The Attorney Exception

You generally do not file a 1099-NEC for payments to a C corporation, S corporation, or an LLC taxed as either. The one exception that catches most businesses off guard: payments to attorneys must always be reported on Form 1099-NEC, even when the law firm is incorporated.⁹

Electronic Filing

If you file 10 or more information returns of any type in a year, you must file them electronically. The count is aggregated across form types, so four 1099-NECs plus six 1099-MISCs equals ten and triggers the e-file requirement. The IRS’s current platform is the Information Returns Intake System (IRIS), which offers a free online portal for small filers.¹⁰ The older FIRE system is scheduled for retirement after the 2026 filing season, so filers still using it should transition to IRIS before filing 2026 tax year returns in early 2027.¹¹ Paper filing remains available only for filers with fewer than 10 information returns and requires the special IRS-issued scannable forms; photocopies are not accepted.

What Missing the Rules Costs

Two categories of penalty apply, and they can stack.

Late or missing 1099-NEC forms for 2026 returns carry per-form penalties that escalate the longer you wait: $60 per form up to 30 days late, $130 per form from 31 days late through August 1, $340 per form after August 1 or not filed at all, and $680 per form for intentional disregard.¹² Failing to file with the IRS and failing to furnish the payee statement are charged as separate failures. A company that paid 50 contractors and files nothing could face more than $34,000 in penalties before interest.

Misclassifying a worker who should have been an employee is far more expensive. Under Section 3509 of the Internal Revenue Code, an employer that failed to withhold because it treated an employee as a contractor owes 1.5% of wages for income tax withholding plus 20% of the employee’s share of FICA taxes if it filed the 1099s, or double those rates (3% and 40%) if it did not.¹³ Those calculations run per worker, over the entire misclassified period. On top of that, a DOL or court finding of employee status can produce back overtime at time-and-a-half for every hour over 40 in a workweek, going back two years or three for willful violations, plus state penalties, unpaid unemployment contributions, and workers’ compensation premiums. Reclassified workers may also become retroactively eligible for benefit plans they were excluded from.

Keep the Records

Keep copies of every W-9, 1099-NEC, written contract, and payment record for at least three years from the date you filed the return or the date the return was due, whichever is later.¹⁴ If you underreported income by more than 25%, the IRS has six years to audit; if you never filed a return, there is no time limit. Seven years is a practical buffer.

Who Owns the Work Product

One difference between employees and contractors catches businesses off guard often enough to deserve its own note. Under federal copyright law, anything an employee creates within the scope of their job is a “work made for hire” and the employer automatically owns the copyright.¹⁵ For an independent contractor, the default is the opposite: the contractor owns the copyright in whatever they create, even if you paid for it.

A written agreement can override this, but only if the work falls into one of nine narrow categories defined in copyright law and the agreement is signed before the work begins. For anything outside those categories — custom software is the most common example — you need a separate written assignment of copyright in the contract. Skip that step and you have paid for work you do not legally own.

1
Internal Revenue Service. Form 1099 NEC and Independent Contractors
2
Internal Revenue Service. Independent Contractor (Self-Employed) or Employee?
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Internal Revenue Service. Employee (Common-Law Employee)
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Internal Revenue Service. About Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
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Federal Register. Employee or Independent Contractor Classification Under the Fair Labor Standards Act
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Internal Revenue Service. Form W-9 (Rev. March 2024) Request for Taxpayer Identification Number and Certification
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Internal Revenue Service. Instructions for the Requester of Form W-9 (Rev. March 2024)
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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
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Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC (04/2025)
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Internal Revenue Service. E-file Information Returns with IRIS
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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 Employers Liability for Certain Employment Taxes
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Internal Revenue Service. How Long Should I Keep Records?
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Office of the Law Revision Counsel. 17 US Code 201 – Ownership of Copyright