Introduction

Last Updated: February 14, 2026

Note: This guide provides general information about 1099 reporting requirements. Tax laws can be complex and change. Consult with a qualified tax professional or CPA for advice specific to your situation. Some states have additional 1099 reporting requirements. Check your state’s department of revenue for specific rules.

Introduction

Every January, agency owners face the same panic: scrambling to collect tax information from freelancers, figuring out who needs a 1099, and meeting the IRS deadline while trying to run their business. Miss the deadline? You’re looking at $60-$630 per form in penalties.

This guide walks you through everything a digital agency needs to know about 1099s—from understanding the basics to implementing a system that makes compliance automatic.

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Table of Contents

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What is a 1099 and Why It Matters

The Basics

A 1099 form is how the IRS tracks income paid to independent contractors and other non-employees. Think of it as the freelancer equivalent of a W-2 form that employees receive.

For digital agencies, 1099s are critical because you likely work with:

• Freelance writers and content creators
• Independent designers and developers
• Marketing consultants and strategists
• Video producers and photographers
• Virtual assistants and project managers
• Subject matter experts for client projects

The IRS’s Perspective: If you paid someone for business services and they’re not your employee, the IRS wants to know about it. The 1099 ensures that freelancers report this income on their tax returns.

Your Perspective: Properly issued 1099s document your business expenses, support your tax deductions, and keep you compliant with federal law.

Types of 1099 Forms

There are actually many types of 1099 forms (1099-INT for interest income, 1099-DIV for dividends, etc.), but agencies primarily deal with:

Form 1099-NEC (Nonemployee Compensation)

• Introduced in 2020, replacing the old 1099-MISC Box 7
• Used for payments to independent contractors and freelancers
• Due January 31 annually
• This is what 95% of agencies will use

Form 1099-MISC (Miscellaneous Information)

• Still exists but for different types of payments
• Rent, royalties, prizes, awards, medical payments
• Less common for typical agency operations
• Due January 31 for most boxes, February 28 for others

Form 1099-K (Payment Card and Third Party Network Transactions)

• Issued by payment processors (PayPal, Stripe, Square)
• Reports gross payment volume processed through their platform
• You typically don’t issue these—Stripe, PayPal, etc. do
• Important to understand for reconciliation purposes

For the rest of this guide, we’ll focus on 1099-NEC since that’s what agencies issue to contractors.

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Who Needs a 1099 (and Who Doesn’t)

The Basic Rule

Issue a 1099-NEC when ALL four of these conditions are met:

1. You paid $600 or more during the calendar year
2. For services performed (not purchasing products/goods)
3. To an individual or unincorporated business (sole proprietor, single-member LLC, partnership)
4. In the course of your trade or business (not personal expenses)

Miss even one of these criteria? No 1099 is required.

YES – Issue a 1099-NEC

Sole Proprietors

• Individual freelancers operating under their own name
• No formal business structure
• Using their Social Security Number (SSN) for taxes

Single-Member LLCs (Taxed as Sole Proprietor)

• One-person LLC that hasn’t elected corporate tax treatment
• Most common structure for freelancers and consultants
• Often uses owner’s SSN (though can have EIN)

Partnerships

• Multi-member LLCs taxed as partnerships
• General partnerships
• Limited partnerships

Law Firms (Special Exception)

• Even if incorporated, law firms receive 1099s
• This is a unique IRS requirement
• Attorneys in corporations still get them

NO – Don’t Issue a 1099-NEC

Corporations (C-Corps and S-Corps)

• Any business with “Inc.” or “Corp” in the name
• LLCs that have elected S-Corp or C-Corp tax status
• The corporation reports its own income; you don’t report it for them
• Exception: Law firms incorporated still get 1099s

Payments Under $600 Annually

• You paid someone $599 total for the year? No 1099 needed.
• This is per vendor, per year—track carefully

Product Purchases

• You bought $5,000 in stock photos from a provider
• You purchased $2,000 in software licenses
• These are goods/products, not services—no 1099

Employee Wages

• W-2 employees never receive 1099s
• Their income is reported via W-2 and payroll tax filings

Payment Processor Transactions

• You paid contractor via PayPal Goods & Services
• You used Stripe to pay an invoice
• The payment processor issues 1099-K; you don’t issue 1099-NEC
• However: Still collect their W-9 for your records

Personal Payments

• You hired someone to clean your home office (personal)
• You paid a contractor for personal work
• Only business-related payments require 1099s

Rent to Real Estate Agents/Property Managers

• Requires Form 1099-MISC, not 1099-NEC
• Different rules and deadlines
• Usually handled by a different process

How to Know for Sure: The W-9 Form

The Form W-9 that contractors complete tells you their business structure. Look at Part I, Box 3:

• Individual/sole proprietor → Issue 1099
• Single-member LLC → Issue 1099 (unless elected corp status)
• C Corporation → Don’t issue 1099
• S Corporation → Don’t issue 1099
• Partnership → Issue 1099
• Trust/estate → Issue 1099

Always collect the W-9 before making any payments. This one document tells you everything you need to know.

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Form W-9: Your Essential First Step

What is Form W-9?

Form W-9 (Request for Taxpayer Identification Number and Certification) is a simple one-page form that contractors complete to provide their tax information. It’s not filed with the IRS—you keep it for your records.

What Information W-9 Collects

Line 1: Name (as shown on their tax return) Line 2: Business name (if different from Line 1) Line 3: Business entity type (sole proprietor, LLC, corporation, etc.) Line 4: Exemptions (usually blank for most contractors) Part I, Box 5 or 6: Address Part I, Box 7: List account numbers (optional, usually blank) Part II: Taxpayer Identification Number (SSN or EIN) Part III: Certification and signature

When to Collect W-9s

BEFORE paying anyone. This is critical. Here’s why:

Scenario 1: You Get the W-9 First

• New contractor signs on
• You request W-9 as part of onboarding
• They complete it in 5 minutes
• You pay them
• January comes, you have all info needed for 1099s

Scenario 2: You Pay First, Get W-9 Later

• New contractor starts immediately
• You pay them $5,000 over 6 months
• Project ends, they move on
• January comes, you need their W-9
• They’ve changed email, don’t respond, or ghosted
• You miss the filing deadline
• IRS penalties: $310 per form

Make W-9 collection non-negotiable part of contractor onboarding. No W-9, no payment. It’s that simple.

How to Request a W-9

Email Template:

Subject: W-9 Form Needed - [Your Agency Name]

Hi [Contractor Name],

We're excited to work with you! Before we can process any payments, we need you to complete IRS Form W-9 for our records.

You can:
• Download the form here: [link to IRS.gov W-9]
• Or complete it online here: [link to your system]

Please return the completed form to [email address] within 3 business days.

Once we receive it, we'll be able to process payments immediately.

Thanks,
[Your Name]

Pro Tips:

• Make it part of your contractor agreement/onboarding
• Use DocuSign or HelloSign for electronic signatures
• Store digitally in cloud storage (Google Drive, Dropbox)
• Keep for at least 4 years (IRS audit period is 3 years)

What to Do if Someone Refuses to Provide a W-9

IRS Requirement: If a contractor refuses to provide a W-9, you’re required to withhold 24% of their payments for backup withholding.

Practical Reality: Most freelancers provide W-9s without issue. If someone refuses:

1. Explain it’s required by law for payments over $600
2. Clarify you don’t share it with anyone except IRS (if required)
3. If they still refuse, either don’t work with them or implement backup withholding

Legitimate contractors understand this is standard business practice.

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Critical Deadlines for 2026

January 31, 2026

Multiple Critical Deadlines on This Date:

1. Provide Copy B to Contractors

• Contractors must receive their 1099-NEC by this date
• Can be mailed (postmarked by Jan 31) or delivered electronically
• They need this to file their personal tax returns

2. File Copy A with IRS

• Paper filing deadline: January 31, 2026
• Electronic filing deadline: January 31, 2026
• Note: 1099-NEC has earlier deadline than other 1099 forms

Why January 31? The IRS moved up the 1099-NEC deadline (used to be February 28 for paper) to combat fraud and help contractors file taxes on time.

Other Important Dates

Throughout 2025: Collect W-9s from all contractors before paying them

December 31, 2025: Last day of tax year—any payments made by this date count toward 2025 1099s

January 1-15, 2026: Generate 1099 reports from accounting software, verify accuracy, chase down any missing W-9s

January 16-30, 2026: Prepare and file 1099s (don’t wait until the last minute!)

January 31, 2026: DEADLINE—all 1099-NECs must be filed

February 1, 2026 onward: Late filing penalties begin accumulating

April 15, 2026: Contractors’ personal tax returns due (they need your 1099 to file accurately)

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Common Agency Scenarios

Let’s walk through real-world situations agencies face and whether 1099s are required.

Scenario 1: Freelance Content Writer

Situation:

• You hire Sarah, a freelance writer
• She’s a sole proprietor
• You pay her $1,200/month for blog content
• Total for year: $14,400
• Payment method: Check or ACH

1099 Required? ✅ YES

Why:

• Over $600 ✅
• Payment for services ✅
• Sole proprietor (unincorporated) ✅
• Business expense ✅

Action Items:

• Collect W-9 before first payment
• Track payments in accounting software with “1099 contractor” flag
• Issue 1099-NEC for $14,400 by January 31

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Scenario 2: Design Agency (LLC, S-Corp Election)

Situation:

• You hire Creative Studios LLC for web design
• They completed W-9 showing S-Corp election
• You paid them $25,000 for client project
• Payment method: ACH transfer

1099 Required? ❌ NO

Why:

• Over $600 ✅
• Payment for services ✅
• S-Corporation (incorporated) ❌
• Business expense ✅

Even though they’re an LLC, they elected S-Corp tax status. S-Corps are treated as corporations for 1099 purposes and are exempt.

Action Items:

• Keep their W-9 on file (shows S-Corp status)
• No 1099 needed
• Track payment as normal business expense

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Scenario 3: Multiple Small Contractors

Situation:

• You hired 12 different freelancers for small projects
• Each received between $200-$500
• Total paid to all 12: $4,800
• No single contractor exceeded $600

1099 Required? ❌ NO (for any of them)

Why: The $600 threshold is per contractor, not aggregate. Since no individual contractor received $600 or more, no 1099s are required.

Action Items:

• Still collect W-9s from each (good practice)
• Track payments in case someone returns in 2026
• If the same person gets $400 in 2025 and $300 in 2026, they’ll need 1099 for 2026

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Scenario 4: Contractor Paid via PayPal Business

Situation:

• You hired a developer, John
• Sole proprietor
• You paid $8,000 via PayPal Goods & Services
• PayPal charges you fees, developer receives $7,600 net

1099 Required from You? ❌ NO

Why: Payment processors (PayPal, Stripe, Square, Venmo Business) issue Form 1099-K to contractors who receive over $600 in a year. You don’t need to issue 1099-NEC because the payment processor is reporting it.

Action Items:

• Collect W-9 anyway (for your records in case IRS asks)
• Track the payment in your accounting system
• Don’t issue 1099-NEC (would create duplicate reporting)

Important Note: This is for payments via payment processor. If you paid the same developer via check or direct ACH, you WOULD need to issue 1099-NEC.

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Scenario 5: Facebook/Google Ad Spend

Situation:

• You manage $50,000/month in Facebook Ads for clients
• Facebook charges your agency credit card
• You bill clients for ad spend + management fee
• Total annual ad platform payments: $600,000

1099 Required? ❌ NO

Why:

• Meta/Facebook is a corporation (exempt)
• Google is a corporation (exempt)
• Even though over $600 ✅

All major ad platforms are corporations and exempt from 1099 reporting.

Action Items:

• Track ad spend separately in accounting (use projects/classes by client)
• Reconcile monthly platform invoices vs credit card charges
• No 1099s needed for platforms

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Scenario 6: Law Firm for Client Contract Review

Situation:

• You hired Smith & Associates, PC (professional corporation)
• They reviewed client contracts and terms of service
• You paid $3,500 for legal services
• They’re incorporated

1099 Required? ✅ YES

Why: Law firms are a special exception. Even incorporated law firms receive 1099s. This is an IRS requirement specific to attorney fees.

Action Items:

• Collect W-9 (will show they’re a law firm)
• Issue 1099-NEC for $3,500
• This applies to individual attorneys and law firms regardless of corporate status

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Scenario 7: Contractor Who Crosses $600 Mid-Year

Situation:

• February 2025: You pay Maria (sole proprietor) $400 for logo design
• August 2025: You hire Maria again for $300 social media graphics
• Total 2025: $700

1099 Required? ✅ YES

Why: The $600 threshold is cumulative for the calendar year. Even though neither individual payment exceeded $600, the total for 2025 is $700.

Action Items:

• Track all payments per contractor in your accounting system
• Set up alerts when contractors approach $600
• Issue 1099-NEC for $700 total

Pro Tip: This is why tracking everyone (even under $600) matters—they might return later in the year.

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Scenario 8: Foreign Contractor

Situation:

• You hire Juan, a developer in Argentina
• Sole proprietor
• Paid $10,000 via wire transfer for web development

1099 Required? ❌ NO (but different form required)

Why: Foreign contractors working outside the US don’t receive 1099-NEC. However, you need Form W-8BEN (Certificate of Foreign Status) from them to document they’re foreign and exempt from US tax withholding.

Action Items:

• Collect Form W-8BEN before paying
• Keep on file for your records
• May need to report on Form 1042-S if withholding required (complex—consult CPA)
• Track payments separately from domestic contractors

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Scenario 9: Subcontractor Who’s Also Your Client

Situation:

• Design agency is your client—you do their SEO
• They’re also your subcontractor—they do design work for your clients
• You paid them $12,000 for design services in 2025
• They’re an LLC (sole member, no corp election)

1099 Required? ✅ YES

Why: The fact that they’re also your client doesn’t matter. You paid them for services, they’re unincorporated, and it’s over $600.

Action Items:

• Collect W-9 for your vendor records
• Issue 1099-NEC for $12,000 paid to them
• They’ll handle their own books for what you paid them as a client

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Scenario 10: Intern/Stipend Payment

Situation:

• You provided $3,000 stipend to a college intern
• Not an employee (no W-2)
• Not really a contractor either (not billing hourly for services)
• Stipend for educational experience

1099 Required? Maybe—consult your CPA

Why: This is a gray area. If the intern performed services that benefited your business, it’s likely contractor income requiring 1099-NEC. If it was purely educational with minimal business benefit, it might be a scholarship/fellowship (different reporting).

Action Items:

• Consult with your accountant before making stipend payments
• Collect W-9 or W-9S depending on their guidance
• Document the nature of the internship arrangement

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Step-by-Step: Your Year-Round 1099 Process

Treating 1099s as a January crisis is a mistake. Implement a year-round system and compliance becomes automatic.

Phase 1: Contractor Onboarding (Before First Payment)

Step 1: Update Your Contractor Agreement Include a clause requiring W-9 completion before payment:

“Contractor agrees to provide completed IRS Form W-9 before receiving any payments. Failure to provide W-9 may result in 24% backup withholding as required by law.”

Step 2: Create Onboarding Checklist

• [ ] Contractor signs service agreement
• [ ] Contractor completes Form W-9
• [ ] W-9 reviewed for completeness (name, TIN, signature)
• [ ] W-9 stored in secure location (digital folder or software)
• [ ] Contractor set up in accounting software
• [ ] “1099 Contractor” flag enabled in software
• [ ] Payment can now be processed

Step 3: Set Up Contractor in Accounting Software

In FreshBooks:

• Go to Team Members → Add Team Member
• Select “Contractor”
• Enable “Track for 1099”
• Enter details from W-9
• Save

In QuickBooks:

• Go to Expenses → Vendors
• Add new vendor
• Check “Track payments for 1099”
• Enter Tax ID from W-9
• Select entity type
• Save

In Xero:

• Go to Contacts → Add Contact
• Select “Supplier”
• Enter Tax Number from W-9
• Mark as “1099 Contractor” in notes
• Save

Phase 2: Throughout the Year (January-December)

Monthly Tasks:

Week 1: Pay Contractors

• Process payments via check, ACH, or wire
• Accounting software automatically tracks against contractor
• Expenses categorized properly

Week 2-4: Reconcile

• Match bank/credit card transactions
• Verify contractor payments categorized correctly
• Ensure payments allocated to correct vendor

Quarterly Tasks:

End of Each Quarter (March 31, June 30, Sept 30, Dec 31):

• Run “1099 Contractor Report” in accounting software
• Review who’s approaching $600 threshold
• Verify all W-9s are on file
• Chase down any missing W-9s from new contractors

What to Look For:

• Contractors at $500+ (might cross $600 by year-end)
• Any new contractors added without W-9 on file
• Duplicate vendor entries that should be merged

Phase 3: Year-End Preparation (December)

Early December Tasks:

Week 1: Generate Preliminary Report

• Run full-year 1099 report (January 1 – December 1)
• Identify all contractors who’ll likely exceed $600 by year-end
• Create list of contractors needing 1099s

Week 2: Verify W-9s

• Cross-reference 1099 list with W-9 files
• Identify any missing W-9s
• Send urgent requests for missing forms

Missing W-9 Email Template:

Subject: URGENT: W-9 Form Needed for Year-End Tax Filing

Hi [Contractor Name],

Our records show you provided services totaling $[amount] in 2025. IRS regulations require us to file Form 1099-NEC for payments exceeding $600.

We need your completed Form W-9 by December 20 to meet our filing obligations.

Please download and complete: [link]

Return to: [email]

If we don't receive this by December 20, we may be required to withhold 24% from any future payments for backup withholding.

Thanks for your prompt attention to this.

[Your Name]

Week 3: Final Review

• Review contractor list for accuracy
• Merge any duplicate vendor entries
• Verify amounts match bank records
• Update any address changes

Week 4: Prepare for Filing

• Subscribe to e-filing service if not already subscribed
• Verify accounting software can generate 1099 data files
• Set reminder for early January filing

Phase 4: Filing Season (January 1-31)

Week 1 (January 1-7):

Generate Final Reports

• Lock down previous year in accounting software
• Run final 1099 contractor report (full year)
• Export to Excel for review
• Total should equal sum of all contractor payments

Verify Data Accuracy

• Contractor names match W-9 forms exactly
• Addresses are current
• Tax IDs are complete
• Amounts are accurate

Week 2-3 (January 8-21):

Prepare 1099s

Method 1: Accounting Software Built-In (Easiest)

• QuickBooks: Expenses → 1099 Contractors → Prepare 1099s
• FreshBooks: Expenses → 1099 Center → Generate 1099s
• Follow wizard, verify all data
• Cost: $10-15 per form for e-filing

Method 2: Tax Software (TurboTax Business, H&R Block)

• Import data from accounting software
• Review and correct any errors
• E-file directly through tax software
• Cost: $20-40 for software + e-filing fees

Method 3: IRS FIRE System (Free)

• Free e-filing system from IRS
• Manual data entry (tedious for multiple forms)
• No cost but time-intensive
• Register at IRS.gov/FIRE

Method 4: Paper Filing (Not Recommended)

• Purchase 1099-NEC forms from office supply store
• Type or handwrite (black ink only)
• Mail Copy A to IRS, Copy B to contractor
• Must be postmarked by January 31
• Prone to errors and delays

Week 4 (January 22-31):

File with IRS

• E-file Copy A with IRS
• Distribute Copy B to contractors (email PDF or mail)
• Copy C kept for your records
• Confirm successful filing (check for confirmation emails)

Document Everything

• Save filing confirmations
• Store copies of all 1099s issued
• Keep for at least 4 years
• Note: IRS can audit up to 3 years back

Phase 5: Post-Filing (February onward)

Handle Corrections

• Contractors may notify you of errors
• Name misspelling, wrong address, incorrect amount
• File Form 1099-NEC Correction (often called “corrected 1099”)
• Mark clearly as “CORRECTED” on form

Update Systems

• Archive previous year’s 1099 data
• Clear out old contractor addresses if they’ve changed
• Update processes based on what worked/didn’t work
• Train any new team members on process

Prepare for Next Year

• Make any W-9 requests for new contractors
• Set calendar reminders for quarterly reviews
• Update contractor onboarding documents

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How to File 1099s (Paper vs Electronic)

Paper Filing (Old School)

How It Works:

1. Purchase 1099-NEC forms from office supply store (Staples, Amazon)
2. Forms come in sheets with Copy A (red ink, for IRS), Copy B (for contractor), Copy C (for you)
3. Type information on forms using typewriter or laser printer
4. Mail Copy A to IRS by January 31 (postmark counts)
5. Mail or hand deliver Copy B to contractors by January 31
6. Keep Copy C for your records

Pros:

• No software fees
• Works for 1-2 contractors
• Straightforward process

Cons:

• Time-consuming for multiple contractors
• High error rate (typos, math errors)
• Postage costs
• No automatic tracking
• Must mail separately to IRS and each contractor
• Slower processing by IRS
• No instant confirmation of receipt

Cost: $20-40 for form sets from office supply, plus postage

Best For: Agencies with 1-2 contractors only, extremely tight budgets

Electronic Filing (Modern Standard)

How It Works:

1. Use accounting software, tax software, or IRS FIRE system
2. Enter or import contractor data
3. Review for accuracy
4. Submit electronically to IRS
5. System generates PDF copies for contractors
6. Email PDFs to contractors or mail printed copies

Pros:

• Fast and efficient
• Automatic error checking (catches missing TINs, formatting issues)
• Instant confirmation of receipt
• Digital records easy to store
• Can send hundreds of 1099s in minutes
• Contractors receive copies faster (email)
• Built into most accounting software

Cons:

• Service fees ($10-15 per form typically)
• Requires IRS Transmitter Control Code (TCC) for direct filing
• Must register for FIRE system if filing directly

Cost:

• Via accounting software: $10-15 per form
• Via tax software: $20-40 for software + per-form fees
• Via IRS FIRE: Free but requires registration

Best For: Agencies with 3+ contractors, anyone who values efficiency

Electronic Filing Options Compared

Option 1: Through Your Accounting Software ⭐ RECOMMENDED

QuickBooks Online:

• Built into Plus and Advanced plans
• Cost: $14.99 per 1099-NEC form
• Process: Expenses → 1099 Contractors → Prepare 1099s
• E-files directly with IRS, emails PDFs to contractors
• Pros: Seamless integration, data already in system
• Best for: QuickBooks users

FreshBooks:

• Available as add-on service
• Cost: Contact for pricing (typically $10-15 per form)
• Process: Expenses → 1099 Center
• Pros: Data already tracked, simple wizard
• Best for: FreshBooks users

Xero:

• Requires third-party integration (TaxBandits, Tax1099)
• Cost: $30-60 for service + per-form fees
• Process: Export data, import to service, file
• Pros: Accurate data export from Xero
• Cons: Extra step vs QuickBooks/FreshBooks
• Best for: Xero users willing to use integration

Zoho Books:

• Can generate 1099 reports, requires manual filing
• Cost: Free report, separate e-filing service needed
• Process: Generate report, use IRS FIRE or third-party service
• Pros: Free report generation
• Cons: Manual e-filing step
• Best for: Budget-conscious Zoho users

Option 2: Tax Preparation Software

TurboTax Business:

• Includes 1099 preparation and e-filing
• Cost: $200-300 for software (includes some e-filings)
• Pros: If already using for business taxes, convenient
• Cons: Must purchase full software

H&R Block Business:

• Similar to TurboTax
• Cost: $150-250 for software
• Pros: Integrated with business tax return prep

Option 3: Dedicated 1099 Services

Tax1099.com:

• Specialized 1099 e-filing service
• Cost: Starts at $2.95 per form
• Pros: Inexpensive, no subscription
• Cons: Must manually enter or import data

TaxBandits:

• Popular third-party e-filing service
• Cost: $5.99-$8.99 per form depending on volume
• Pros: User-friendly, good for high volume
• Cons: Another platform to learn

Track1099:

• Year-round tracking + e-filing
• Cost: $149/year for unlimited 1099s
• Pros: Flat rate good for agencies with many contractors
• Cons: Separate system from accounting

Option 4: IRS FIRE System (Filing Information Returns Electronically)

How It Works:

• Free government e-filing system
• Must register for Transmitter Control Code (TCC)
• Registration takes 45 days—plan ahead!
• Manual data entry (no import)

Pros:

• Completely free
• Official IRS system
• No third-party middleman

Cons:

• Tedious manual data entry
• 45-day registration wait time
• Not user-friendly
• Time-consuming for multiple 1099s

Best For: Agencies committed to DIY and have time to invest

Link: https://fire.irs.gov/

Our Recommendation

For Most Agencies: Use your accounting software’s built-in e-filing ($10-15 per form)

• Data is already entered correctly
• One-click filing process
• Worth the cost for time saved
• Automatic record-keeping

For High-Volume Agencies: Consider Track1099 or similar ($149/year unlimited)

• Cost-effective if issuing 15+ forms annually
• Breaks even at ~15 forms vs per-form pricing

For Budget-Conscious Agencies: IRS FIRE system (free)

• Requires advance registration (don’t wait until January!)
• Time investment vs money savings trade-off

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Accounting Software That Makes This Easy

The right accounting software transforms 1099 compliance from nightmare to non-issue. Here’s how the top platforms handle contractor tracking and 1099 filing.

QuickBooks Online – Most Comprehensive 1099 Features

1099 Capabilities:

• Built-in contractor tracking (flag vendors as “Track for 1099”)
• Automatic payment tracking by contractor
• Threshold alerts when approaching $600
• Year-end 1099 report generation
• Direct e-filing with IRS from software
• Automatic PDF delivery to contractors
• W-9 storage within contractor profile

How It Works:

1. Set up contractor as vendor
2. Enable “Track payments for 1099” checkbox
3. Enter Tax ID from W-9
4. All payments automatically tracked
5. In January: Expenses → 1099 Contractors → Prepare 1099s
6. Review data, click File, done

Pricing:

• QuickBooks Plus or higher required: $99+/month
• E-filing cost: $14.99 per 1099-NEC form
• Includes Copy A (IRS) + Copy B (contractor)

Pros:

• Most streamlined process
• Data accuracy (pulled directly from transactions)
• IRS-approved e-filing
• Stores W-9s digitally
• Excellent for accountants (they know QuickBooks)

Cons:

• Most expensive base software
• Per-form e-filing fee adds up
• Requires Plus plan minimum ($99/mo)

Best For: Established agencies with 5+ contractors, agencies prioritizing ease of use

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FreshBooks – Great for Service-Based Agencies

1099 Capabilities:

• Contractor tracking (team members marked as “Contractor”)
• Automatic payment tracking
• 1099 preparation center
• E-filing available through partner integration
• Professional contractor reports

How It Works:

1. Add contractor as team member (select “Contractor” role)
2. Enable 1099 tracking
3. Enter W-9 information
4. Payments automatically tracked when tagged to contractor
5. In January: Access 1099 Center for filing

Pricing:

• FreshBooks Premium required: $60/month
• E-filing cost: Contact FreshBooks for pricing (typically $10-15/form)

Pros:

• Intuitive interface
• Strong time tracking integrates with contractor payments
• Project-based tracking links to contractors
• Clean reports for review

Cons:

• E-filing requires add-on service
• Less robust than QuickBooks for pure accounting
• Fewer integrations

Best For: Service-based agencies where contractors track time and bill by project

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Xero – Best Value for Teams

1099 Capabilities:

• Contact tracking with 1099 designation
• Payment tracking by contact
• 1099 report generation
• Requires third-party service for e-filing (TaxBandits, Tax1099)

How It Works:

1. Set up contractor as contact (type: supplier)
2. Add Tax Number from W-9
3. Add custom field or note “1099 Contractor”
4. Track all payments to contact
5. In January: Run report, export to e-filing service
6. Use TaxBandits or Tax1099 for IRS filing

Pricing:

• Xero Established: $78/month (unlimited users)
• E-filing service: $30-60 base + $3-8 per form

Pros:

• Unlimited users (cost-effective for teams)
• Excellent reporting
• Strong international features if you have foreign contractors
• Accurate data export for e-filing

Cons:

• No built-in IRS e-filing
• Extra step with third-party service
• Must manually match report to e-filing service

Best For: Growing agencies with teams who need unlimited user access and don’t mind using separate e-filing service

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Zoho Books – Budget-Friendly Option

1099 Capabilities:

• Vendor 1099 tracking
• Payment tracking by vendor
• 1099 report generation
• Manual e-filing or third-party service required

How It Works:

1. Add contractor as vendor
2. Enter Tax ID
3. Mark as “1099 Vendor” in system
4. Track payments to vendor
5. Generate 1099 report
6. Export to IRS FIRE or third-party service for filing

Pricing:

• Zoho Books Professional: $40/month
• E-filing: Use IRS FIRE (free) or third-party service

Pros:

• Most affordable option with 1099 tracking
• Generates accurate reports
• Good automation features

Cons:

• No built-in e-filing
• Interface less intuitive
• Must handle filing separately

Best For: Budget-conscious agencies comfortable with manual e-filing step

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Wave – Free with Limitations

1099 Capabilities:

• Basic vendor tracking
• Payment categorization by vendor
• Can run reports showing payments by vendor
• No built-in 1099 features
• Manual process required

How It Works:

1. Set up contractors as vendors
2. Categorize payments to each vendor
3. In January: Run “Vendor Report” showing annual totals
4. Manually prepare 1099s using report data
5. Use IRS FIRE for free e-filing

Pricing:

• Wave accounting: Free
• E-filing: IRS FIRE (free) or paid service

Pros:

• Free accounting software
• Can track the necessary data
• Works for simple scenarios

Cons:

• No automatic 1099 preparation
• Manual data entry to e-filing system
• Time-consuming process
• More error-prone

Best For: Micro-agencies with 1-2 contractors, extreme budget constraints, high tolerance for manual work

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Feature Comparison

Software	Built-In 1099 Tracking	E-Filing	Cost	Best For
QuickBooks Online	✅ Excellent	✅ Yes, $14.99/form	$99/mo + filing fees	Full-service ease
FreshBooks	✅ Very Good	⚠️ Via partner	$60/mo + filing fees	Service agencies
Xero	✅ Good	❌ Requires 3rd party	$78/mo + service fees	Growing teams
Zoho Books	✅ Good	❌ Manual required	$40/mo	Budget-conscious
Wave	⚠️ Basic	❌ Manual required	Free	Micro-agencies

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Penalties for Non-Compliance

The IRS takes 1099 compliance seriously. Here’s what happens if you fail to file correctly or on time.

Late Filing Penalties

Filed 1-30 Days Late:

• $60 per form
• If you file on February 15 when deadline was January 31: $60 × number of forms

Filed 31+ Days Late (but before August 1):

• $120 per form
• If you file on March 15: $120 × number of forms

Filed After August 1 or Not at All:

• $310 per form
• If you never file or file in September: $310 × number of forms

Intentional Disregard:

• $630 per form (minimum)
• No maximum penalty
• If IRS determines you willfully ignored requirements

Real-World Cost Examples

Scenario 1: Small Agency (5 contractors)

• Deadline: January 31
• You file: March 1 (30+ days late)
• Penalty: $120 × 5 = $600

Scenario 2: Medium Agency (15 contractors)

• Deadline: January 31
• You file: September (after August 1)
• Penalty: $310 × 15 = $4,650

Scenario 3: Growing Agency (30 contractors)

• Deadline: January 31
• You never file (intentional disregard)
• Penalty: $630 × 30 = $18,900+

These penalties are per year. If you have a pattern of non-compliance, penalties compound.

Incorrect Information Penalties

Even if you file on time, incorrect information triggers penalties:

Wrong Name or Tax ID:

• Same penalty structure as late filing
• $60-$310 per form depending on when corrected

Wrong Address:

• May prevent contractor from receiving Copy B
• Results in IRS notices and potential penalties

Wrong Amount:

• Creates problems for contractor’s tax return
• May trigger audit for you or contractor
• Correction required (costs time and money)

How to Avoid Penalties

1. Implement Year-Round System Don’t wait until January. Track throughout the year.

2. Collect W-9s Before Payment No W-9 = no payment. Make it non-negotiable.

3. Use Accounting Software Automatic tracking eliminates manual errors.

4. Set Quarterly Reminders Review contractor payments every 3 months.

5. File Early Don’t wait until January 31. File by January 20 for buffer.

6. Double-Check Everything Before filing, verify:

• Names match W-9 exactly
• Tax IDs are correct
• Addresses are current
• Amounts are accurate

7. E-File When Possible Electronic filing catches errors before submission.

Penalty Relief (Reasonable Cause)

If you have legitimate reasons for late or incorrect filing, you can request penalty abatement. Valid reasons include:

• Natural disaster affecting business
• Serious illness or death
• Fire, casualty, or unavoidable absence
• System failure beyond your control

How to Request:

• Write letter to IRS explaining circumstances
• Include supporting documentation
• File Form 843 (Claim for Refund)
• Don’t count on approval—file correctly to begin with

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Common Mistakes and How to Avoid Them

Mistake #1: Not Collecting W-9 Before Payment

The Problem: You hire a contractor urgently, pay them immediately, forget to get W-9. Six months later they’re unresponsive and you can’t file their 1099.

The Cost:

• $310 penalty for not filing
• 24% backup withholding on future payments
• Potential IRS audit flag

The Fix:

• Make W-9 collection mandatory in contractor onboarding
• No W-9 = no payment policy
• Use contract clause requiring W-9
• Set up accounting software to require Tax ID before creating vendor

Prevention System:

Contractor Onboarding Checklist:
☐ Service agreement signed
☐ W-9 received and reviewed
☐ W-9 stored in secure location
☐ Contractor added to accounting system
☐ 1099 tracking enabled
☐ THEN payment can be processed

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Mistake #2: Assuming All LLCs Are Exempt

The Problem: You hire Smith Design LLC, assume they’re incorporated and don’t need 1099. They’re actually a single-member LLC taxed as sole proprietor—they DO need 1099.

The Cost:

• $310 penalty for not filing
• Contractor can’t prove income for their taxes
• Awkward January scramble

The Fix:

• W-9 tells you exactly what they are (Part I, Line 3)
• Single-member LLC with no corp election = issue 1099
• LLC that elected S-Corp or C-Corp = no 1099 needed
• When in doubt, check the W-9

Entity Type Decision Tree:

Is it an LLC?
├─ Yes
│  └─ Did they elect S-Corp or C-Corp status on W-9?
│     ├─ Yes → No 1099 needed
│     └─ No → Issue 1099
└─ No
   └─ Is it a Corporation (Inc. or Corp)?
      ├─ Yes → No 1099 needed (except law firms)
      └─ No → Issue 1099

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Mistake #3: Not Tracking Payments Under $600

The Problem: You pay Sarah $450 in March for a project. In November, you hire her again for $300. You never tracked the March payment because it was under $600. Total for year: $750—but you didn’t issue 1099.

The Cost:

• $60-$310 penalty
• Missed deadline trying to figure out if total exceeded $600

The Fix:

• Track ALL contractor payments regardless of amount
• Accounting software automatically aggregates
• Set alerts when contractors approach $600
• Review quarterly reports

Prevention: Every contractor gets:

• W-9 collected
• Set up in accounting system with 1099 flag
• All payments tracked to their vendor record
• Automatic running total

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Mistake #4: Mixing Personal and Business Payments

The Problem: You pay a contractor $3,000 for business work and $500 to clean your home office (personal). You issue 1099 for $3,500 total.

The Cost:

• Contractor reports $3,500 as income
• IRS sees $3,500 deduction on your business return
• $500 personal expense isn’t deductible—audit flag

The Fix:

• Keep business and personal completely separate
• Only report business payments on 1099
• If same contractor does both, separate payments and records
• Use different payment methods (business account for work, personal for home)

Correct Approach:

• Business payment: $3,000 via business account → Issue 1099 for $3,000
• Personal payment: $500 via personal account → No 1099 (personal expense)

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Mistake #5: Forgetting About Law Firms

The Problem: You paid Johnson Law, PC (professional corporation) $5,000 for legal services. They’re incorporated so you assume no 1099 needed. Wrong—law firms are an exception.

The Cost:

• $310 penalty
• Law firm can’t reconcile their books
• Potential attorney-client awkwardness

The Fix:

• Remember: attorneys and law firms ALWAYS get 1099s
• Doesn’t matter if they’re incorporated
• This is a specific IRS exception
• Their W-9 will often remind you (they know the rule)

Red Flags to Watch:

• Any payment for legal services
• Attorneys, law firms, legal consultants
• Contract review, terms of service, legal advice
• Even incorporated = still issue 1099

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Mistake #6: Using Contractor’s PayPal Email as Address

The Problem: You pay contractor via PayPal. You enter their PayPal email (john.doe@email.com) as their “address” in your system. IRS requires physical mailing address on 1099.

The Cost:

• 1099 filed with incorrect address
• Contractor never receives Copy B
• $60-$120 penalty for incorrect filing

The Fix:

• W-9 provides physical mailing address
• Use W-9 address on all tax forms
• Payment method email ≠ mailing address
• Verify address before filing

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Mistake #7: Not Reconciling Payment Processor Reports

The Problem: You paid contractor $5,000 via Stripe/PayPal. You issue 1099-NEC. Payment processor also issues them 1099-K. Contractor receives $10,000 in 1099 forms for $5,000 of actual income.

The Cost:

• Contractor’s tax return shows income discrepancy
• IRS notices mismatch
• Audit potential for both parties
• Angry contractor

The Fix:

• If paid via payment processor (PayPal, Stripe, etc.) = Don’t issue 1099-NEC
• Payment processor issues 1099-K = your job is done
• If paid via check/ACH = Issue 1099-NEC
• Never issue both for same payment

Decision Chart:

Payment Method → 1099 Form Needed?

Check → You issue 1099-NEC
ACH/Wire Transfer → You issue 1099-NEC
PayPal Friends/Family → You issue 1099-NEC
PayPal Goods/Services → PayPal issues 1099-K (you don't issue NEC)
Stripe → Stripe issues 1099-K (you don't issue NEC)
Venmo Business → Venmo issues 1099-K (you don't issue NEC)
Credit Card → Card processor issues 1099-K (you don't issue NEC)

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Mistake #8: Not Filing Corrected 1099s

The Problem: You filed 1099 showing $10,000 paid to contractor. Contractor contacts you—actual amount was $8,000. You apologize but don’t file correction. Their tax return doesn’t match your 1099.

The Cost:

• IRS computer matching flags discrepancy
• Potential audit for contractor
• You look unprofessional
• Possible penalties

The Fix:

• File corrected 1099-NEC immediately
• Mark clearly as “CORRECTED”
• Send corrected copy to contractor
• Keep documentation of correction

How to File Correction:

1. Generate new 1099-NEC with correct information
2. Check “CORRECTED” box
3. File with IRS (same process as original)
4. Send corrected copy to contractor
5. Document reason for correction

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Mistake #9: Issuing 1099 to Corporations

The Problem: You paid Tech Solutions, Inc. $50,000 for software development. Their W-9 clearly shows “C Corporation.” You issue 1099 anyway because amount is large.

The Cost:

• Unnecessary work for you
• Confusion for contractor
• Possible penalties if contractor disputes
• Wastes time in January

The Fix:

• Review W-9 entity type BEFORE filing
• Corporations (C-Corp, S-Corp) = exempt (except law firms)
• Trust your system: if software says “no 1099 needed,” don’t issue
• When in doubt, consult accountant

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Mistake #10: Missing the Deadline

The Problem: You think deadline is end of February (like old 1099-MISC). You miss January 31 deadline for 1099-NEC.

The Cost:

• $120 penalty per form (filed 31+ days late)
• If you have 10 contractors: $1,200 penalty
• Contractors can’t file their taxes on time

The Fix:

• Mark your calendar: January 31
• Start preparing in early January
• File by January 20 for safety buffer
• Set up recurring annual reminders

Key Date Reminders:

• December 15: Begin year-end 1099 prep
• January 5: Generate reports, verify W-9s
• January 15: Prepare 1099s, review accuracy
• January 20: File with IRS (buffer for issues)
• January 31: DEADLINE

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Month-by-Month Compliance Calendar

Stay compliant year-round with this monthly task list.

January

Priority: File Previous Year’s 1099s

• Week 1-2: Generate 1099 reports, verify accuracy
• Week 3: Prepare and file 1099-NECs
• Week 4: Confirm successful filing, distribute copies
• Deadline: January 31

February

Priority: Corrections & Setup

• Handle any 1099 corrections needed
• Set up any new contractors hired in January
• Update accounting system for new year
• Review process: what worked, what didn’t?

March

Priority: First Quarter Review

• Run Q1 contractor payment report
• Identify contractors approaching $600
• Verify all Q1 contractors have W-9s on file
• Update contractor addresses if changed

April

Priority: Tax Season

• Assist accountant with any 1099-related questions
• File business tax return (uses 1099 data)
• Keep copies of all 1099s with tax records

May

Priority: System Maintenance

• Review contractor list, archive inactive vendors
• Update contractor onboarding documents
• Train any new team members on 1099 process

June

Priority: Mid-Year Review

• Run 6-month contractor payment report
• Flag contractors likely to exceed $600 by year-end
• Ensure all new contractors have W-9s
• Mid-year checkpoint meeting

July

Priority: Clean Up

• Merge duplicate vendor entries
• Update vendor information (addresses, contact info)
• Verify 1099 tracking flags are correct

August

Priority: Process Check

• Review contractor onboarding process
• Ensure all recent hires have W-9s on file
• Run contractor payment report through August

September

Priority: Third Quarter Review

• Run Q3 contractor payment report
• Identify contractors who’ve crossed $600 threshold
• Send reminder emails to contractors approaching threshold
• Verify all W-9s are current and complete

October

Priority: Year-End Prep Begins

• Review contractor list for year-end
• Identify anyone likely to exceed $600 by December
• Update any missing or outdated contractor information

November

Priority: W-9 Collection Push

• Send W-9 requests to any contractors missing forms
• Follow up aggressively (harder to get in January)
• Run preliminary 1099 report

December

Priority: Final Preparations

• Week 1: Generate year-to-date contractor report
• Week 2: Verify all W-9s on file for $600+ contractors
• Week 3: Chase missing W-9s urgently
• Week 4: Final review, prepare for January filing

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Special Situations & FAQs

What if a Contractor Refuses to Provide Their SSN?

Options:

1. Accept EIN Instead: If they have one, equally valid
2. Don’t Work With Them: You can refuse service
3. Implement Backup Withholding: Withhold 24% of payments as required by law

Most legitimate contractors provide W-9s without issue. Refusal is unusual and concerning.

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Do I Need to Issue 1099 for Rent?

Short Answer: Maybe, but different form.

Details:

• Rent paid to individuals or property managers: Form 1099-MISC (not 1099-NEC)
• Rent paid to real estate corporations: No 1099 needed
• Threshold: $600 or more annually
• Due date: January 31 for most, some exceptions

Best Practice: Ask your landlord or property manager for W-9. They’ll know which form they need.

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What About Foreign Contractors?

Foreign contractors working outside the US:

• Don’t receive Form 1099-NEC
• Collect Form W-8BEN instead (Certificate of Foreign Status)
• May need to report on Form 1042-S if withholding required
• Complex area—consult with CPA for specifics

Foreign contractors working in the US:

• Treated same as domestic contractors
• Issue 1099-NEC if over $600
• Collect Form W-9

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Can I E-File All My 1099s for Free?

Yes, through IRS FIRE system, but:

• Must register 45 days in advance (get TCC code)
• Manual data entry (no import)
• Time-consuming for multiple forms
• Learning curve

Most agencies find paying $10-15 per form through accounting software is worth it for time saved.

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What if I Discover I Forgot to File from Previous Years?

File Immediately, even if years late:

• Penalties are smaller if you file voluntarily vs IRS discovering
• Shows good faith effort
• Consult CPA about penalty abatement request

Steps:

1. Gather payment records for missing year(s)
2. Contact contractors for W-9s if you don’t have them
3. Prepare 1099s for each year
4. File with IRS (note which year each belongs to)
5. Expect penalty notices from IRS
6. Consider requesting penalty abatement with CPA’s help

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My Contractor Lost Their Copy. Can I Send Another?

Yes, you can re-send Copy B at any time:

• Pull from your records (Copy C)
• Print or email PDF
• Not filed with IRS again (already filed)
• Just providing duplicate for contractor’s records

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Final Checklist: Are You 1099 Compliant?

Use this checklist to verify your agency is fully compliant:

System Setup:

• [ ] Contractor onboarding process includes mandatory W-9 collection
• [ ] Accounting software properly configured for 1099 tracking
• [ ] All contractors flagged as “1099 vendor/contractor” in system
• [ ] W-9s stored securely (digital folder or in software)
• [ ] Access restricted to authorized team members only

Throughout the Year:

• [ ] Every contractor has W-9 on file before first payment
• [ ] All payments to contractors tracked in accounting software
• [ ] Quarterly reviews of contractor payment reports
• [ ] System for tracking when contractors approach $600
• [ ] Regular backups of accounting data

December Prep:

• [ ] Year-end contractor payment report generated
• [ ] All $600+ contractors identified
• [ ] All W-9s verified as complete and current
• [ ] Missing W-9s chased down and collected
• [ ] Contractor addresses updated
• [ ] E-filing service tested and ready

January Filing:

• [ ] Final 1099 reports generated and reviewed
• [ ] Data accuracy verified (names, amounts, TINs)
• [ ] 1099s filed with IRS by January 31
• [ ] Copy B distributed to contractors by January 31
• [ ] Copy C saved for records (retain 4+ years)
• [ ] Filing confirmations saved
• [ ] Process documented for next year

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Conclusion

1099 compliance doesn’t have to be a January nightmare. With the right systems—collecting W-9s upfront, using accounting software that tracks automatically, and reviewing quarterly—it becomes a non-issue.

Key Takeaways:

✅ Collect W-9 before paying anyone (no exceptions) ✅ Use accounting software with built-in 1099 tracking ✅ Review quarterly, not annually ✅ E-file through your accounting software (worth the $10-15/form) ✅ File early (by January 20, not January 31) ✅ Keep records for 4+ years

The agencies that struggle with 1099s are the ones who ignore it until January. The agencies that sail through? They implemented a year-round system and let software do the heavy lifting.

Recommended Software for 1099 Compliance:

• Best Overall: QuickBooks Online Plus ($99/mo) – Most comprehensive features
• Best for Service Agencies: FreshBooks Premium ($60/mo) – Clean interface, project tracking
• Best Value for Teams: Xero Established ($78/mo) – Unlimited users
• Best Budget Option: Zoho Books Professional ($40/mo) – Affordable with good features

Start today: collect W-9s from all current contractors, set them up properly in your accounting software, and mark your calendar for quarterly reviews. Your January 2027 self will thank you.

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