If you pay independent contractors, freelancers, or subcontractors, the IRS wants to know about it. The Form 1099-NEC is how you report those payments, and the rules around it have shifted in recent years. Getting this wrong can mean penalties, audits, and a very unpleasant letter from the IRS.
Let us break down what you need to know in plain language.
What Is Form 1099-NEC?
NEC stands for Nonemployee Compensation. If you paid someone who is not your W-2 employee $600 or more during the tax year for services, you are generally required to file a 1099-NEC reporting that payment.
This applies to sole proprietors, partnerships, and LLCs. It does not typically apply to payments made to corporations, though there are exceptions for attorneys and medical providers.
The $600 Threshold
The magic number is $600. If you paid a contractor $600 or more in a calendar year, you must file a 1099-NEC. This is not per job. It is the total for the entire year.
Here is where business owners get tripped up. You hired a graphic designer for three small projects. Each one was $250. Total for the year: $750. That triggers the 1099-NEC requirement even though no single payment crossed $600.
When Is It Due?
The 1099-NEC is due to both the contractor and the IRS by January 31st. There is no automatic extension for this form. Miss the deadline and you are looking at penalties starting at $60 per form for filings up to 30 days late, increasing to $310 per form if you file after August 1st.
Get a W-9 Before You Pay
This is the single most important habit. Before you pay any contractor for the first time, get a completed Form W-9. The W-9 gives you their legal name, business name, address, and taxpayer identification number.
If you wait until January to collect W-9s, you will chase people who have moved on and do not return your calls. Get it upfront. Make it part of your onboarding process.
Common Mistakes We See
Misclassifying Employees as Contractors
This is the big one. The IRS looks at the degree of control you have over how the work is done. If you set their hours, provide their tools, and direct their work, they are probably an employee regardless of what your contract says.Forgetting About Cash Payments
Cash payments to contractors still count. If you paid your landscaper $800 in cash over the year, that is reportable.Not Filing for Deceased Contractors
If a contractor passed away during the year, you still file the 1099-NEC. It goes to their estate.What Happens If You Do Not File?
The IRS matches 1099s against tax returns. If you reported a $5,000 deduction for subcontractor work but never filed a 1099-NEC, that deduction is going to get flagged. It does not mean you lose the deduction, but it does mean you are more likely to face scrutiny.
Action Steps
Collect W-9s from every contractor before their first payment. Track all contractor payments throughout the year, not just at year end. File 1099-NECs by January 31st. If you are behind, get caught up now. The penalties for late filing are far less painful than the penalties for not filing at all.