There’s also a major change happening right now: the threshold for issuing a 1099-NEC is rising from $600 to $2,000. The rules for 2025 payments (filed in early 2026) are different from the rules for 2026 payments (filed in early 2027). This guide covers both — what applies now, what’s changing, and how to pay contractors correctly along the way.
First: are they actually a contractor, or are they an employee?
Before anything else, make sure the person you’re paying is genuinely an independent contractor and not an employee. This is the single most expensive mistake small business owners make in this area, and the IRS takes worker status seriously.
A general rule of thumb:
- Employees work under your direction — you control when, where, and how they do the work
- Independent contractors control their own schedule, methods, and usually work for multiple clients
If you treat someone like an employee but pay them as a contractor, you can end up owing back payroll taxes, penalties, and interest. When in doubt, check the IRS worker classification guidance or ask a CPA. Get this right up front — it determines everything else, including whether you issue a W-2 or a 1099-NEC at year-end.
Step 1: Get a W-9 before you pay them
A W-9 is a one-page form an independent contractor fills out giving you their legal name, address, business entity type, and taxpayer identification number (TIN — typically a Social Security Number or EIN). You need this before you pay them, not after.
Two reasons:
- It’s much harder to get a W-9 after you’ve already paid someone. Most contractors will fill out a W-9 to get paid. Far fewer will respond to a follow-up email in February when you need it for tax filing.
- Without a valid TIN, you may be required to apply 24% backup withholding to their payments — meaning you’d hold back nearly a quarter of every payment until you get the form.
Make the W-9 part of contractor onboarding: no form, no first payment. It’s the simplest fix to a problem that creates real headaches every January.
Step 2: Choose how to pay them
There are a few common ways to handle contractor payments, each with tradeoffs:
- Check — Simple, paper trail, slow. Fine for one-off payments.
- ACH / direct deposit — Cheap, fast, easy to track in your bank accounts. Standard for ongoing relationships.
- Payment platforms (PayPal, Stripe, Venmo for Business) — Convenient, but these digital payments come with a separate reporting wrinkle (covered below).
- Payroll software with contractor features — Tools like Gusto, QuickBooks, or similar handle contractor payments and generate 1099s automatically at year-end. Worth it once you have several contractors.
For most small businesses, ACH is the cleanest setup: it’s traceable in your bank feed, lines up with your bookkeeping, and creates a clear record at tax time. Whatever method you choose, agree on a payment schedule with the contractor (net 15, net 30, on completion) and stick to it — inconsistent payments cause the most disputes.
Step 3: Know whether you actually need to issue a 1099
This is where the law just changed, so the threshold depends on when the payments were made:
- For 2025 payments (reported in early 2026): You must issue a 1099-NEC for any contractor you paid $600 or more during the calendar year for services.
- For 2026 payments (reported in early 2027): The threshold rises to $2,000. This change came from the One Big Beautiful Bill Act, signed in July 2025. The threshold will adjust for inflation each year after that.
A few important exceptions that apply in both years:
- C-corporations and S-corporations generally don’t receive 1099-NECs. You typically only issue them to individuals, sole proprietors, partnerships, and LLCs that aren’t taxed as S-corps. The W-9 tells you which category they’re in.
- Lawyers and law firms are an exception — issue a 1099 regardless of entity type.
- Payments made by credit card or through third-party payment platforms (PayPal, Stripe, Venmo for Business) are not reported on a 1099-NEC. The payment platform handles its own reporting on Form 1099-K when its threshold is met. Don’t double-report.
That last point trips up a lot of business owners. If you paid a contractor $5,000 via Stripe, you don’t issue a 1099-NEC. If you paid the same contractor $5,000 by check or ACH, you do.
Even with the higher threshold coming in 2026, keep collecting W-9s from every contractor — you won’t always know upfront which ones will cross the line.
Step 4: File the 1099-NEC by January 31
For contractors who meet the threshold, two things have to happen:
- Send the contractor their copy of Form 1099-NEC by January 31
- File a copy with the IRS by January 31
Same deadline for both. No extra time for e-filing like some other forms get. If January 31 falls on a weekend, the deadline shifts to the next business day — for the 2025 tax year, that means Monday, February 2, 2026.
A few mechanics worth knowing:
- If you have 10 or more total information returns for the year (1099s plus any W-2s), the IRS requires you to e-file. Paper filing isn’t an option above that count.
- The IRS offers a free e-filing system called IRIS (Information Returns Intake System). Most payroll software and bookkeeping platforms also handle 1099 filing as a feature.
- Late penalties stack per form: $60 if you file within 30 days late, $130 if 31+ days late through August 1, and $340 or more for filings later than that or marked as intentional disregard. Miss ten forms and you’re looking at thousands.
This is where year-round bookkeeping actually pays for itself. Filing 1099s is fast when your books are clean and your contractors are categorized correctly. It’s painful when neither is true. (More on staying current versus playing catch-up: Monthly Bookkeeping vs Catch-Up Bookkeeping.)
Common mistakes to avoid
The recurring issues we see with contractor payments:
- No W-9 on file — leads to scrambling in January and potential backup withholding requirements
- Treating an employee like a contractor — saves money short-term, costs much more if the IRS reclassifies
- Missing the deadline — penalties stack quickly, per form
- Double-counting platform payments — issuing a 1099-NEC on payments already routed through PayPal or Stripe
- Forgetting to aggregate small payments — three $250 payments to the same contractor still meets the $600 threshold for 2025
- Mixing up 1099-NEC and 1099-MISC — 1099-NEC is for nonemployee compensation; 1099-MISC covers rent, prizes, awards, and other specific categories
Frequently asked questions
You generally don’t issue a 1099-NEC for those payments. The payment platform handles its own reporting under Form 1099-K rules. To avoid double-reporting, only issue 1099-NECs for contractors you paid directly by check, ACH, or wire.
It depends on how the LLC is taxed. If it’s taxed as a sole proprietorship or partnership, yes — when payments meet the threshold. If it’s taxed as an S-corp or C-corp, generally no (with exceptions for lawyers and medical providers). The W-9 they fill out will tell you which.
You’re required to apply 24% backup withholding to their payments and remit that to the IRS. In practice, most contractors fill out the form once they understand the alternative is getting paid 24% less. The cleanest move is to require the W-9 before the first payment goes out.
We’re a bookkeeping firm, not a tax filing service, so we don’t file 1099s on your behalf. What we do handle is the piece that makes 1099 season easy or painful: organizing your vendor and contractor records throughout the year so that when January rolls around, you (or your CPA) have everything you need to file cleanly and on time.
Where to start
If your contractor records are scattered across email threads, bank statements, and a half-filled spreadsheet, January is going to be painful — whether the threshold is $600 or $2,000.
SoFlo360 helps small business owners organize vendor and contractor records throughout the year, so when 1099 season hits, the work is already done. Spanish-friendly support is available for owners who’d rather handle financial conversations in Spanish.
Book a free consultation or learn more about our bookkeeping services.