Paying a contractor creates a reporting obligation, and almost everything that makes that obligation easy or painful happens before the first payment leaves.
Collect the payee's details at the point of engagement and January is a transcription exercise. Leave it, and you are chasing somebody who has already finished the work, already been paid, and has no reason to reply.
This covers who has to be reported, what to gather before paying, how to track the payments through the year, how the form is completed and distributed, and what happens when a payee's details turn out to be wrong.
If your business paid $600 or more to an independent contractor, freelancer, or self-employed individual in a calendar year, you are required to file Form 1099-NEC, Nonemployee Compensation, with the IRS and provide a copy to the recipient. This step-by-step guide covers the entire process from collecting W-9s to filing electronically.
Who Needs to File Form 1099-NEC?
- Any business (sole proprietor, partnership, C-corp, S-corp, LLC) that paid $600 or more in nonemployee compensation to an individual or unincorporated business during the year
- Payments for services performed in the course of your trade or business
- Payments to attorneys (even if incorporated, special rule) for legal services
- Fish purchases from anyone engaged in the trade or business of catching fish
You do NOT file 1099-NEC for: payments to C-corporations or S-corporations (except attorneys and healthcare providers), payments under $600 for the year, or employees (use W-2 for employees).
Everything difficult about this is decided before you pay anybody. Collect the payee's information first, record their status when you set them up, and the January exercise becomes transcription. Leave it, and you are chasing somebody who has already been paid and has no reason to reply.
Ankit Sarawagi, CPA, CA, MBA · LinkedInPayment Threshold
| Tax Year | Filing Threshold |
|---|---|
| 2024 and prior | $600 |
| 2025 | $600 |
| 2026 and future | $2,000 (SECURE 2.0 Act change) |
Step 1: Collect Form W-9 Before Making Payments
Before paying any contractor, collect a completed Form W-9 (Request for Taxpayer Identification Number and Certification). The W-9 gives you the contractor's legal name, TIN (SSN or EIN), and address, everything you need to file the 1099-NEC. Keep all W-9s on file for at least 4 years.
Pro Tip: If a contractor refuses to provide a W-9, you are required to withhold 24% of payments (backup withholding) and remit it to the IRS. Report backup withholding in Box 4 of Form 1099-NEC.
Step 2: Track Payments Throughout the Year
Maintain a record of every payment to each contractor: date, amount, method. Note: payments made through PayPal, Venmo, or credit card processors may be reported by those processors on Form 1099-K rather than 1099-NEC. However, the IRS has delayed threshold enforcement for 1099-K, verify current rules.
Step 3: Complete Form 1099-NEC
Box-by-Box Guide
| Box | What to Enter |
|---|---|
| Payer's information | Your business name, address, TIN |
| Recipient's information | Contractor name, address, TIN from W-9 |
| Box 1, Nonemployee compensation | Total amount paid during the year |
| Box 2, Payer made direct sales >$5,000 (checkbox) | Check if applicable (typically for consumer goods resale) |
| Box 4, Federal income tax withheld | Backup withholding amount, if any |
| Boxes 5-7, State information | State tax withheld, payer state number, state income |
Step 4: Distribute Copies to Recipients
Send Copy B to the recipient (contractor) by January 31. You can deliver electronically with the recipient's consent. There is no extension available for the recipient copy deadline.
Step 5: File with the IRS
| Filing Method | Deadline |
|---|---|
| Paper filing (Copy A to IRS) | January 31 |
| E-filing via IRIS or other approved transmitter | January 31 |
Note: unlike most other information returns, Form 1099-NEC has the same January 31 deadline for both paper and electronic filing. The IRS IRIS (Information Returns Intake System) is the free e-filing system, use it for up to 250 forms or more.
Correcting Errors on 1099-NEC
- Prepare a new 1099-NEC with the correct information.
- Check the 'Corrected' box at the top of the form.
- File the corrected Copy A with the IRS.
- Send corrected Copy B to the recipient.
- Do not file a second original, only corrected forms.
Penalties for Late or Missing 1099-NEC
| Timing of Correction | Penalty Per Form (2025) |
|---|---|
| Filed within 30 days of due date | $60 |
| Filed after 30 days but by August 1 | $120 |
| Filed after August 1 or not at all | $310 |
| Intentional disregard | $630 (minimum) |
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Frequently Asked Questions
Do I need to file 1099-NEC for a one-time payment to a plumber?
Only if the plumber was paid for services in the course of your trade or business (not for personal home repairs) and the total exceeded $600. A homeowner paying a plumber for a home repair does not file 1099-NEC, a business paying a plumber for business facility repairs does.
What if I paid a contractor via Venmo?
Payments through third-party payment networks (Venmo, PayPal, Cash App) that cross the 1099-K reporting threshold may be reported by the payment platform on 1099-K. However, the safest practice is still to collect a W-9 and file 1099-NEC for all business service payments of $600+.
Is the 1099-NEC deductible as a business expense?
The 1099-NEC itself is not deductible, the underlying payment to the contractor is the deductible expense. Issuing the 1099-NEC is simply a reporting requirement.
What should be done before the first payment rather than at the year end?
Collect the payee's information and establish their status, in writing, before any money moves. That single habit removes most of the difficulty from this process. A contractor who has finished the work and been paid has little incentive to respond to a request for details, and the obligation to report correctly remains yours regardless of whether they reply.
What if a payee's details turn out to be wrong?
You will usually find out through a notice, and the response is to seek the correct information from the payee and to follow the procedure the notice sets out, which may include withholding from future payments until the position is resolved. Ignoring it is what escalates the matter, since the obligation to make reasonable efforts to obtain correct details is part of what is being tested.
Written by
Ankit Sarawagi, CPA, CA, MBA
Ankit leads the finance team at Profitjets, where he has worked with 500+ businesses across the US on bookkeeping, tax and CFO-level strategy. He writes about the habits that keep small business books accurate all year. Connect on LinkedIn
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