If your business pays an independent contractor $2,000 or more for services in 2026, you have to report those payments to the IRS on Form 1099-NEC, send a copy to the contractor by January 31, and, in many states, file a parallel state return. Those are the core 1099 requirements for independent contractors, and the details around them (who counts, which form, when to file, what happens if you don’t) are where businesses run into trouble. The $2,000 figure is new. Congress raised the threshold from $600 through the One, Big, Beautiful Bill Act signed in mid-2025, and it takes effect for payments made after December 31, 2025.
When a 1099 Is Required
Three things have to be true before you owe a 1099-NEC: the payment is for services, it’s made in the course of a trade or business, and the annual total to that contractor reaches $2,000.1Office of the Law Revision Counsel. 26 USC 6041 – Information at Source Hiring a painter for your home doesn’t trigger reporting because you’re paying as a private individual. Hiring that same painter to work on your office does. The rule applies whether your business is a sole proprietorship, partnership, LLC, corporation, or nonprofit.
The threshold change matters in practice. For decades the number was $600, and any payment above that had to be reported. Starting with tax year 2026, only payments totaling $2,000 or more require a 1099-NEC, and the same $2,000 floor now applies to Form 1099-MISC.2Internal Revenue Service. Publication 1099 (2026), General Instructions for Certain Information Returns Beginning in 2027 the figure will be adjusted annually for inflation, so a contractor sitting just under the line one year can cross it the next.3Federal Register. Increase in Threshold for Requiring Information Reporting With Respect to Certain Payees Whether or not the payment is reportable, the contractor still owes income tax on every dollar. The threshold governs your paperwork, not their liability.
Payments to Corporations
Payments to a contractor organized as a corporation, including S-corps and C-corps, are generally exempt from 1099-NEC reporting. The W-9 tells you the classification.4Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC
Payments to Attorneys
Legal fees are the exception to the corporation exemption. Payments to an attorney for services are reported on Form 1099-NEC regardless of whether the firm is incorporated, and gross proceeds paid to an attorney (settlement funds, for example) are reported on Form 1099-MISC.4Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC
Collect the W-9 Before You Pay
Get a completed Form W-9 from every contractor at the start of the relationship, before any money moves. The W-9 gives you the legal name, business name, tax classification, and taxpayer identification number you’ll need to fill out the 1099 later.5Internal Revenue Service. Form W-9 – Request for Taxpayer Identification Number and Certification Chasing a W-9 six months after the work is done, when the contractor has moved on, is where filings get missed. Build it into the same onboarding step as the contract itself.
If a contractor won’t provide a TIN, or if the IRS notifies you that the number they gave doesn’t match their records, you’re required to withhold 24% of every payment and remit it to the IRS. This is backup withholding, and it isn’t optional.6Office of the Law Revision Counsel. 26 USC 3406 – Backup Withholding The withholding stops once the contractor supplies a valid TIN.
Which Form: 1099-NEC or 1099-MISC
Pay for services goes on Form 1099-NEC, in Box 1, as nonemployee compensation.7Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC Form 1099-MISC is for a different bucket: rent, royalties, prizes and awards, medical and health care payments, crop insurance proceeds, and gross proceeds paid to attorneys.8Internal Revenue Service. About Form 1099-MISC, Miscellaneous Information Each type of payment has its own designated box, and the 1099-MISC has its own deadlines.
Payments Made by Card or Payment App
If you pay a contractor through a credit card, debit card, or a third-party platform like PayPal or Venmo, you generally don’t report it on Form 1099-NEC. The payment processor handles reporting on Form 1099-K, and the IRS avoids double-counting by giving the 1099-K priority.9Internal Revenue Service. Form 1099-K Frequently Asked Questions
Under the One, Big, Beautiful Bill Act, the 1099-K threshold reverted to $20,000 in gross payments and more than 200 transactions in the calendar year, and both conditions have to be met before the processor is required to file.10Internal Revenue Service. IRS Issues FAQs on Form 1099-K Threshold Under the One, Big, Beautiful Bill So a contractor paid $15,000 through Venmo won’t receive a 1099-K, and you don’t owe a 1099-NEC because the payment went through a third-party processor. The contractor still owes tax on the income; neither party has a reporting duty in that scenario.
Federal Filing Deadlines
- Form 1099-NEC is due to the IRS and to the contractor by January 31, whether you file on paper or electronically, and no extensions are available.7Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC
- Form 1099-MISC is due to the contractor by January 31, to the IRS by February 28 on paper, or by March 31 if filed electronically.2Internal Revenue Service. Publication 1099 (2026), General Instructions for Certain Information Returns
Deadlines that land on a weekend or federal holiday roll to the next business day.
Paper vs. Electronic Filing
A business that files 10 or more information returns of any type during the calendar year has to file electronically. The count aggregates across form types, so six 1099-NECs plus four W-2s hits the threshold.11Internal Revenue Service. Topic No. 801, Who Must File Information Returns Electronically The IRS runs two electronic channels: the legacy FIRE system12Internal Revenue Service. Filing Information Returns Electronically (FIRE) and the newer IRIS portal, which lets you enter returns manually or upload a spreadsheet.13Internal Revenue Service. E-File Information Returns With IRIS FIRE is scheduled to retire after the 2026 filing season, leaving IRIS as the sole electronic intake channel.
If you file on paper, include Form 1096 as a cover sheet summarizing the number of returns and total dollar amount being submitted.14Internal Revenue Service. About Form 1096, Annual Summary and Transmittal of US Information Returns
Penalties for Missing or Wrong Filings
Penalties scale with how late the correction is. For returns due in 2026, the per-form amounts are $60 if corrected within 30 days of the due date, $130 if corrected by August 1, $340 if corrected after August 1 or never filed, and $680 with no annual cap for intentional disregard.15Internal Revenue Service. Information Return Penalties Annual maximums apply to the first three tiers and are lower for small businesses (those with average annual gross receipts of $5 million or less).16Internal Revenue Service. IRM 20.1.7 Information Return Penalties
These are per-form penalties. Fifty missed returns at $340 each is $17,000 before interest, and choosing not to file at all is the most expensive outcome on the table.
Foreign Contractors
The 1099 rules don’t apply when you’re paying a foreign individual or entity for U.S.-connected services. You use Form 1042-S for each payee and Form 1042 as the annual summary, with a March 15 filing deadline instead of January 31.17Internal Revenue Service. Federal Income Tax Withholding and Reporting on Other Kinds of US Source Income Paid to Nonresident Aliens
The default withholding rate on U.S.-source payments to foreign persons is 30%.18Internal Revenue Service. NRA Withholding A tax treaty between the contractor’s home country and the United States can reduce or eliminate that rate, but the contractor has to provide Form W-8BEN before payment to claim it, and Form 8233 as well if they’re claiming a treaty exemption for independent personal services.19Internal Revenue Service. Instructions for Form W-8BEN A narrow exemption from withholding exists when the contractor is in the U.S. for 90 days or less during the year, total compensation is $3,000 or less, and the contractor works for a foreign employer or the foreign office of a U.S. business.17Internal Revenue Service. Federal Income Tax Withholding and Reporting on Other Kinds of US Source Income Paid to Nonresident Aliens
The Bigger Risk: Misclassification
Issuing a 1099 doesn’t make someone an independent contractor. The IRS looks at the actual working relationship, and if it decides the person is really an employee, you can owe back employment taxes, penalties, and interest on every payment. The agency evaluates three categories of evidence: behavioral control (do you direct how the work gets done, or just the result?), financial control (who sets pay, reimburses expenses, provides tools?), and the nature of the relationship (written contracts, benefits, whether the work is a core function of the business).20Internal Revenue Service. Independent Contractor (Self-Employed) or Employee? No single factor decides the question. If you’re genuinely unsure, you or the worker can file Form SS-8 to ask the IRS for a formal determination.21Internal Revenue Service. About Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
Two relief options can limit exposure. The Voluntary Classification Settlement Program lets a business start treating workers as employees going forward while paying a reduced amount of past employment taxes with limited penalty exposure. You apply on Form 8952 at least 120 days before the reclassification, and you have to have consistently treated the workers as contractors, filed all required 1099s for the past three years, and be free of a current employment tax audit by the IRS or Department of Labor.22Internal Revenue Service. Voluntary Classification Settlement Program Separately, Section 530 relief creates a safe harbor from back employment taxes when you had a reasonable basis for treating workers as contractors, treated all similar workers the same way, and filed 1099s on time.20Internal Revenue Service. Independent Contractor (Self-Employed) or Employee? Consistent 1099 filing is what unlocks that defense, which is one reason to treat the annual filings as more than a paperwork chore.
State Filings on Top of the Federal Rules
Most states with an income tax run their own 1099 reporting programs alongside the federal rules. Thresholds, deadlines, and filing methods vary state by state, and getting federal compliance right doesn’t automatically cover you at the state level.
About 30 states participate in the IRS Combined Federal/State Filing Program, under which the IRS forwards electronically filed 1099 data to participating state agencies at no cost.23Internal Revenue Service. Topic No. 804, FIRE System Test Files and Combined Federal/State Filing (CF/SF) Program If all your contractors are in participating states, the federal filing may be enough. Non-participating states require a direct filing. State thresholds don’t always match the federal $2,000 figure, some states still use lower floors, and state deadlines can run from late January into March. State penalties are separate from federal ones and can include interest on any state tax that should have been withheld. If you pay contractors across state lines, you need a calendar that tracks each state’s threshold, deadline, and filing method.
Keep the Records
The IRS recommends holding onto employment tax records, including 1099s, W-9s, and supporting documentation, for at least four years after the tax becomes due or is paid, whichever is later.24Internal Revenue Service. How Long Should I Keep Records Those files are your first line of defense if the IRS later questions a TIN or a worker’s classification, and reconstructing them after the fact usually isn’t possible.