When you're growing a small business, bringing in independent contractors to fill skill gaps or tackle short-term projects can offer flexibility, cost savings, and access to specialized expertise.  

Many small businesses find that these contractors, also known as 1099 workers or non-employee workers, play a key role in helping them scale efficiently without the commitment of hiring full-time staff.

But with those benefits come responsibilities, especially when it comes to tax reporting.

If you pay an independent contractor $600 or more in 2025 ($2,000 in 2026), you’re required to submit a 1099 form to the IRS. These forms help ensure that you and the contractor stay in compliance with federal tax laws. Failing to file accurately and on time can lead to steep penalties and tax complications.

This article explains what 1099 forms are, why they matter, and what steps small business owners need to take to issue them correctly.

What is a 1099 Form?

Basically, 1099 forms report certain types of income to the IRS.

There are several types of 1099 forms, each designed for different kinds of income. Two of the most common include:

• Form 1099-NEC, Nonemployee Compensation, is used to report nonemployee compensation. This is the form most small businesses will use when paying independent contractors.

• Form 1099-MISC, Miscellaneous Information, is used to report miscellaneous income such as rents, royalties, medical payments, or other non-wage earnings.

Other examples in the 1099 series include:

• Form 1099-INT, Interest Income, is used to report interest income

• Form 1099-DIV, Dividends and Distributions, is used to report dividend income

• Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., reports distributions from retirement accounts

If you pay an independent contractor $600 or more in the 2025 calendar year ($2,000 in 2026), you're required to issue a 1099-NEC to both the contractor and the IRS. The deadline for distributing the form is January 31. Missing the deadline can result in penalties.

Why Do You Need to 1099 Someone?

Wondering why the IRS requires businesses to submit tax forms for non-employees? 1099 forms help the IRS track taxable income that might otherwise go unreported.

As a business owner, you’re not responsible for withholding or paying taxes on behalf of your independent contractors. But you are required to report their income if you paid them $600 or more during the 2025 tax year ($2,000 in 2026). That’s where the 1099-NEC comes in.

To complete this form accurately, you’ll need an up-to-date Form W-9, Request for Taxpayer Identification Number and Certification, from each contractor. The W-9 provides the details you need to file the 1099-NEC, such as the contractor’s legal name, business name (if applicable), address, and taxpayer ID number (TIN).

Staying on top of 1099 deadlines is crucial. Businesses that fail to file Form 1099-NEC or Form 1099-MISC on time may face penalties ranging from $60 to $330 per form, depending on how late the submission is. If a business intentionally disregards the IRS filing requirements, the penalty jumps to a minimum of $660 per form or 10% of the income reported, whichever is greater.

Step-by-Step Guide on How to Use Form 1099

Step 1: Determine If the Worker Is an Independent Contractor

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.  

Step 2: Collect Necessary Information (W-9 Form)

Before you can complete a 1099 form, you’ll need to collect some essential information from your contractor, and that starts with Form W-9.

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, but it’s your responsibility to request it and keep it on file.

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, which means you would need to withhold a percentage of their payment and remit it to the IRS.

Step 3: Fill Out the 1099 Form

Once you have the independent contractor’s completed W-9, you’re ready to fill out Form 1099-NEC. Here's a breakdown of each key section and what to enter:

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

• Payer’s 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

• State income tax withheld (if applicable)

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

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

Step 4: File the 1099 Form

The IRS sets specific deadlines for filing 1099 forms. This varies depending on the type of form and whether you file by mail or electronically. Missing these deadlines can result in penalties, so it’s important to mark your calendar.

Here’s a quick overview of key deadlines for two of the most common 1099 forms for small businesses:

Form 1099-NEC  

• IRS Deadline (Paper or Electronic): January 31

Form 1099-MISC  

• Recipient Deadline: January 31

• (If you're reporting amounts in Box 8 or Box 10, the deadline is extended to February 17)

• IRS Deadline (Paper Filing): February 28

• IRS Deadline (Electronic Filing): March 31

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.

Step 5: 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.  

How to Pay 1099 Workers (Independent Contractors)

Pay Structure for Contractors

Independent contractors typically set their own rates and preferred payment terms. To avoid misunderstandings, be sure to clearly define the work and agreed-upon payment structure in writing before the project begins, whether that's a flat fee, hourly rate, or milestone-based approach. Most 1099 workers will submit invoices to request payment based on those terms.

Payment Methods

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.

Tax Withholding

Independent contractors are responsible for handling their own tax obligations, including income tax and self-employment tax.  

As the payer, you typically don’t withhold taxes unless you're required to apply backup withholding due to an issue with the contractor’s TIN.

How Are Independent Contractors Paid?

Independent contractors are typically paid according to the terms outlined in their contract. These terms may include when and how often invoices will be submitted and what payment method will be used.

To avoid confusion or disputes, it's best to have a written agreement in place 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

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

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 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 ranging 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.

H2: Benefits of Paying Independent Contractors Through a Payroll System

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 system like SurePayroll can help streamline the process and help you stay organized.

SurePayroll makes it easy to schedule and send payments to your contractors, whether they’re billing weekly, monthly, or by project.  

Every transaction is logged, which can make it easier to review payments, respond to contractor questions, and prepare for tax time.

Paying your contractors through a reliable, consistent system can help improve your business relationships. When payments are timely and well-documented, it reflects positively on your business and can help build trust with independent workers.

SurePayroll can also help prepare and file 1099-NEC forms and give you access to downloadable records at year-end. 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.

Conclusion

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.

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