How to Pay 1099 Workers: A Complete Guide For Small Business Owners

For many small business owners, working with independent contractors and freelancers can be a smart and flexible option. These professionals can bring specialized skills to your business without the long-term costs associated with employee benefits, equipment, and ongoing payroll obligations.  

If you’re used to paying employees, paying an independent contractor might feel a little different. Understanding how to pay 1099 employees (even though they aren’t legally employees) can be simpler than it appears once you know the rules.  

Whether you’re engaging a freelancer for a one‑time project or regularly working with contractors, it’s essential to follow the right process, use the correct 1099 form to pay independent contractors, and follow IRS reporting requirements.

In this guide, you’ll learn how to 1099 someone, what information you need before issuing payment, how contractor invoices should be handled, and when you’re required to file Form 1099‑NEC.

We’ll also break down payment best practices, common mistakes to avoid, and why using payroll software for independent contractors can make managing 1099 payments easier and more accurate.  

What Is a 1099 Contractor?

A 1099 contractor is an independent worker, such as a freelancer or self-employed professional, who is engaged to perform specific services or projects for your business. Unlike employees, these workers operate independently and are not on your company’s payroll. You do not withhold income or payroll taxes from 1099 payments, as contractors are responsible for their own taxes. Some payroll services, like SurePayroll, offer a solution where you can pay employees and contractors from the same system.  

How to Pay a 1099 Independent Contractor

Paying a 1099 independent contractor isn’t complicated, but it does require a bit of planning and organization. A clear, consistent process makes it easier to pay contractors correctly and avoid surprises later.

Step 1: Collect W-9 Information Before Work Begins

If you’re unsure how to 1099 someone, the process starts with collecting a completed Form W-9.
Learn more about the difference between W-2 vs 1099 forms here.  

This IRS form provides your business with the necessary details to accurately report payments made to independent contractors. It includes important information such as:

• The contractor’s legal name

• Business name (if applicable)

• Address

• TIN (either a Social Security Number or Employer Identification Number)

• The contractor’s tax classification (e.g., sole proprietor, LLC, or corporation)

It’s the contractor’s responsibility to fill out the W-9, It's the contractor's responsibility to fill out the W-9, but it's your responsibility to get a signed Form W-9 from the contractor to collect their legal name, address, and TIN.

If you don’t have a completed W-9, you risk filing incorrect information. This could lead to IRS penalties. In some cases, the contractor may also be subject to backup withholding. If the IRS notifies you of a TIN mismatch, you must perform backup withholding at a flat rate of 24%.

Step 2. Agree on Payment Terms

There’s no one-size-fits-all best way to pay independent contractors, since contractors typically set their own rates and preferred payment terms. To avoid confusion or disputes, it’s best to have a written agreement in place before any work begins.

To avoid confusion or disputes, it's best to have a clear written contract that outlines payment structure, payment schedule, and deliverables before any work begins.

This agreement should clearly outline:

• The scope of work

• The rate or project fee

• The invoicing and payment schedule

• Any reimbursement policies, if applicable

Step 3. Choose a Payment Method

Contractors may request to be paid by direct deposit, paper check, ACH transfer, or through a third-party payment platform. Whatever method is used, it's best practice to confirm expectations and keep clear documentation of all payments made.

Step 4. Pay Contractors Based on Their Invoices

Most independent contractors submit invoices outlining the work performed, the amount due, and their payment terms. Take time to review these invoices carefully to make sure you're paying for approved services and that the details match your agreement.

It’s also important to keep copies of all contractor invoices for your records, whether you store them digitally or in paper form.  It's considered best practice to keep all W-9s, contracts, invoices, and proof of payment for at least four years.

Paying contractors promptly and according to the agreed-upon schedule helps maintain strong working relationships and makes it easier to track total payments for tax reporting later.

Step 5. Track Total Annual Payments

Keeping an accurate record of how much you pay each contractor throughout the year is an important part of the process.  

Maintaining clear records, whether through accounting software, payroll software, or another system, makes year-end reporting faster and helps reduce the risk of errors or missed filings.

Step 6. Determine Whether You Need to Issue a 1099-NEC

After tracking what you paid each contractor through the year, the next step is determining whether you’re required to issue a Form 1099-NEC. This requirement is based on the total amount you paid an individual contractor during the calendar year.

For 2025, businesses must issue a 1099-NEC if they paid a contractor $600 or more for services. In 2026, the reporting threshold increases to $2,000 or more. This amount is indexed for inflation for the following years. If a contractor’s total payments meet or exceed the applicable threshold, you’re responsible for reporting those payments to the IRS using Form 1099-NEC.

It’s important to note that these thresholds apply per contractor, not to your total contractor spend.

Even if you work with multiple contractors and pay some of them less than the threshold, you'll need to issue a 1099-NEC for each individual contractor who meets the threshold as well as file with the IRS by January 31. If you file 10 or more information returns, you are required to e-file with the IRS.

How to Use a 1099 Form

Form 1099-NEC is the primary independent contractor 1099 form used to report payments made to independent contractors for services performed during the year. If a contractor’s total pay meets the IRS reporting threshold, this form tells the IRS how much you paid and provides the contractor with the information they need for their own tax filing.

Using Form 1099-NEC correctly is an important part of staying compliant and avoiding penalties. The sections below explain how to complete, file, and distribute the form so you can meet your reporting obligations with confidence.

Fill Out the 1099 Form

Here's a breakdown of each key section of form 1099-NEC and what to enter:

• Payer’s name and address: Enter your business name, street address, city, state, and ZIP code.

• Payer’s taxpayer identification number (TIN): This is typically your Employer Identification Number.

• Recipient’s TIN: Enter the independent contractor’s Social Security Number or Employer Identification Number, depending on how they filled out their W-9.

• Box 1 - Non-employee compensation: Report the total amount paid to the contractor for services during the tax year ($600 or more in 2025, $2,000 in 2026).

• Recipient’s name: Enter the independent contractor’s full legal name as shown on their W-9.

• Box 2 - Sales indicator: If you sold $5,000 or more in consumer products directly to the contractor for resale, check this box.

• Recipient’s address: Include the independent contractor's street address, city, state, and ZIP code.

• Box 3 – Leave this space blank.

• Box 4 – Federal income tax withheld: If you withheld any federal income tax, due to backup withholding or at the contractor’s request, report that amount here.

If your state requires 1099-NEC filing, complete the following:

• State tax identification number: Enter your business’s state-issued tax identification number, if applicable.

• State income tax withheld (if applicable): Report any state income tax withheld from the contractor’s payments.

• State income: Enter the total amount paid to the contractor that was earned in that state.

State filing requirements can vary, so it’s a good idea to check with your state tax agency or a tax professional to confirm whether additional reporting is required.

For many small businesses, using payroll software like SurePayroll® by Paychex can help take the guesswork out of completing a 1099 form for contractors. These tools can help you store contractor information, track payments throughout the year, and generate and file 1099s.

File the 1099 Form

The IRS deadline for filing the 1099-NEC is January 31. Missing this deadline can result in penalties, so it’s important to mark your calendar.

Form 1099-NEC can be filed electronically or by mail. Many businesses choose e-filing because it’s faster, more efficient, and provides confirmation of receipt, while paper filing may take longer to process.

To make the process easier, you can e-file directly through the IRS’s Information Returns Intake System (IRIS) or use payroll software like SurePayroll to generate and submit your 1099 forms.

Distribute Copies

Once the 1099 forms are completed, it's time to send them to the appropriate parties. You must provide each independent contractor with a copy of their 1099 form by January 31. This allows them to report their income accurately when filing their taxes.

In addition to sending copies to your workers and the IRS, be sure to keep copies for your records. You should retain these forms, along with the W-9s and documentation of payments, for at least four years.

Maintaining proper records is important in case of an IRS audit or if questions arise later about how much was paid or whether a 1099 was filed.  

Common Mistakes to Avoid Using Form 1099

Engaging independent contractors can be a smart way to access specialized skills and maintain flexibility, but it’s important to stay compliant with IRS and labor regulations. Seemingly small mistakes can result in major financial penalties, audits, or legal trouble.

Here are some of the most common errors businesses make and why they matter.

Misclassifying Employees as Independent Contractors

Misclassifying someone as an independent contractor when they meet the criteria for an employee is one of the costliest mistakes a business can make. Consequences may include:

• Owing back taxes, including both the employer and employee portions of Social Security and Medicare

• Interest and fines from the IRS

• Legal action from the Department of Labor  

• Liability for unpaid benefits like overtime, minimum wage, unemployment insurance, and workers’ compensation insurance

• Potential lawsuits from misclassified workers

Before a person begins working for you, it’s important to confirm that the worker is classified correctly. Is the worker truly an independent contractor, or should they be considered an employee?  

The IRS evaluates several factors which generally focus on the level of control the business has over the worker. No single factor determines classification. It's about the overall nature of the relationship.  

Here are the three main categories the IRS uses to assess worker classification:  

• Behavioral control: Do you direct what the worker does and how they do it? This includes setting specific procedures, offering training, or requiring tasks to be completed in a particular way.  

• Financial control: Who makes the key decisions, like how the worker is compensated, whether expenses are covered, or who supplies the tools and materials needed for the job?  

• Nature of the relationship: Is there a contract outlining terms? Do you offer perks typically given to employees, like paid time off or benefits? Consider whether the work is expected to continue long-term and whether it’s central to your daily operations.  

Failing to categorize your workers correctly can result in costly misclassification penalties. Please note, there are other laws covering the topic of independent contractors. The information here focuses on the IRS rules and their impact on worker payments and taxes.  

Read more about the difference between employees and independent contractors here.  

Failing to Collect a W-9

Before making any payments, you should always collect a completed Form W-9 from each contractor. If you fail to do so:

• You may not have the correct taxpayer identification number (TIN) needed to file the 1099-NEC.

• You could trigger backup withholding, which requires you to withhold 24% of the contractor’s pay and send it to the IRS.

• You risk filing incorrect forms, which can lead to penalties.

Late or Incorrect Filing

Missing deadlines or submitting incorrect information on your 1099 forms can create a ripple effect. You might face:

• Penalties can range from $60 to $330 per form, depending on how late the filing is.

• A minimum penalty of $660 per form if the IRS determines you willfully neglected to file.

• Increased chances of being audited by the IRS.

Not Tracking Payments Throughout the Year

Failing to track contractor payments as they’re made can lead to missed reporting requirements at year-end. Without up-to-date, accurate payroll records, businesses may overlook contractors who meet the 1099-NEC reporting threshold or scramble to gather information under tight deadlines.

Keeping consistent records throughout the year reduces the risk of errors when it’s time to file. It also makes it easier to identify discrepancies early and stay prepared for tax season.

Misunderstanding Which Payments Require a 1099-NEC

One common source of confusion is knowing which contractor payments must be reported on Form 1099-NEC.  

Businesses generally do not issue a 1099-NEC for payments made by credit card, debit card, or through third-party payment networks such as PayPal, Stripe, Venmo, or Cash App. In these cases, the payment processor is typically responsible for reporting the transactions to the IRS using Form 1099-K.

Form 1099-NEC is usually required only for payments made directly to contractors by cash, check, or bank transfer outside of a third-party payment platform. Misunderstanding this distinction can lead to duplicate reporting or unnecessary filings, which may create confusion for both you and your contractors.

Benefits of Using Payroll Software for Contractor Payments

Managing payments to independent contractors can get complicated, especially if you're working with multiple contractors, tracking invoices, or preparing year-end forms. A payroll solution like SurePayroll can help streamline the process and keep everything in one place.

Using payroll software for contractor payments offers several key benefits, including accurate payroll records and audit logs. Other benefits include:

• Easier payment scheduling

• Centralized payment tracking

• Improved contractor relationships

• Simplified 1099 preparation

While it’s still your responsibility to review any required tax forms, using a payroll platform can save considerable time and free you to focus on your business.

Making 1099 Payments Simple

Working with independent contractors can help your business grow efficiently, but it requires staying organized and on top of IRS requirements, such as completing and distributing 1099-NEC forms.

If you haven’t already, now is a good time to set up systems for handling contractor onboarding, payments, and tax reporting. Establish clear agreements, track payments carefully, and make sure you're prepared in advance of tax season.

You don’t have to manage it all on your own. Using a payroll provider like SurePayroll means you can pay both W-2 employees and 1099 contractors within the same system. This setup can assist with generating 1099 forms at year-end and help ensure those payments are reflected in your financial reports, helping you save time and improve visibility into your overall labor costs.

Interested in streamlining how you manage contractor and employee payments? Learn more about how SurePayroll can help.