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What is a 1099?

Introduction

The Basics: A 1099 is an IRS tax form used to report income paid to non-employees (independent contractors, freelancers, vendors). It’s how the IRS tracks income that doesn’t go through traditional W-2 employee payroll.

The most common type for small businesses is Form 1099-NEC (Nonemployee Compensation), which replaced the old 1099-MISC Box 7 starting in 2020.

When You Need to Issue a 1099-NEC

You must issue a 1099-NEC when ALL of these are true:

  1. You paid $600 or more in the calendar year
  2. For services (not goods/products)
  3. To an unincorporated business or individual (sole proprietors, single-member LLCs, partnerships)
  4. In the course of your business (not personal payments)

Who Gets a 1099?

YES – Issue 1099:

  • Freelance writers, designers, developers
  • Independent consultants
  • Sole proprietors providing services
  • Single-member LLCs (taxed as sole proprietor)
  • Partnerships providing services
  • Law firms (special exception – always get 1099s even if incorporated)

NO – Don’t Issue 1099:

  • Corporations (Inc. or Corp) – with that law firm exception
  • S-Corps and C-Corps (unless they’re law firms)
  • Payments under $600 in the year
  • Payments for merchandise/products
  • Employee wages (that’s W-2 territory)
  • Rent paid to real estate agents/property managers (different 1099 form)
  • Credit card or PayPal payments (the payment processor issues 1099-K)

Key Deadlines for 2026

  • January 31, 2026: Deadline to send 1099-NEC to contractors
  • January 31, 2026: Deadline to file with IRS (both paper and electronic)
  • Throughout the year: Collect W-9 forms from contractors before paying them

The W-9 Form: Your First Step

Before you pay any contractor, have them complete Form W-9. This form gives you:

  • Their legal name
  • Their Tax ID (SSN or EIN)
  • Their address
  • Their business structure (sole proprietor, LLC, etc.)

Pro tip: Don’t pay anyone until you have their W-9 on file. It’s much harder to chase it down later when you’re scrambling in January.

Digital Agency Specific Scenarios

Scenario 1: Freelance Writer

  • You pay a freelance writer $8,000 over the year for blog content
  • They’re a sole proprietor
  • Action: Issue 1099-NEC for $8,000

Scenario 2: Design Agency (LLC)

  • You pay a design agency $15,000 for client work
  • They’re an LLC taxed as S-Corp
  • Action: No 1099 needed (corporations are exempt)

Scenario 3: Multiple Small Contractors

  • You pay 10 different contractors $500 each = $5,000 total
  • Each individual received less than $600
  • Action: No 1099s needed (under $600 threshold per person)

Scenario 4: Facebook Ad Spend

  • You spend $50,000 on Facebook Ads on behalf of clients
  • This is payment for advertising services to Meta (a corporation)
  • Action: No 1099 needed (corporation + advertising service)

Scenario 5: Subcontractor Paid via PayPal

  • You pay a developer $10,000 via PayPal Goods & Services
  • Action: No 1099-NEC needed from you (PayPal issues 1099-K)
  • BUT: Still get their W-9 for your records in case IRS asks

Penalties for Not Filing

The IRS takes 1099s seriously:

  • $60 per form if filed within 30 days of deadline
  • $120 per form if filed 30+ days late (but before August 1)
  • $310 per form if filed after August 1 or not at all
  • Intentional disregard: $630 per form (minimum)

For a small agency with 10 contractors, that’s potentially $3,100-$6,300 in penalties. Ouch.

How Accounting Software Helps

This is where your article can really shine with affiliate opportunities:

FreshBooks Premium ($60/mo)

  • Tracks contractor payments automatically
  • Flags when someone crosses $600 threshold
  • Generates 1099 reports with all necessary info
  • Can file electronically (additional service fee)

QuickBooks Online Plus ($99/mo)

  • Tracks contractors as “vendors” with 1099 tracking enabled
  • Automatic alerts when the threshold is met
  • Integrated 1099 e-filing service ($14.99 per 1099)
  • Stores W-9s digitally

Xero ($78/mo)

  • Tracks contractor payments by contact
  • 1099 reporting available (requires manual filing)
  • Less automated than competitors, but still tracks the data

Zoho Books ($40/mo)

  • Contractor tracking with 1099 categorization
  • Generates 1099 reports
  • Manual e-filing required

Best Practices for Agencies

Set Up Properly from Day 1:

  1. Create a “Contractors/1099 Vendors” category in your accounting software
  2. Collect W-9 before first payment (make it part of onboarding)
  3. Enable 1099 tracking for each contractor vendor
  4. Review quarterly to see who’s approaching $600

Create a Contractor Onboarding Process:

  • Send the contractor agreement
  • Collect completed W-9
  • Set them up in the accounting system with 1099 tracking enabled
  • Store W-9 in a secure location (keep for 4 years)

Year-End Process (Do This in December):

  1. Pull the 1099 report from the accounting software
  2. Verify all W-9s are on file
  3. Chase down missing W-9s before January
  4. Review for accuracy (correct amounts, correct vendors)
  5. Prepare to file by the January 31 deadline

Digital Record Keeping:

  • Scan and store W-9s digitally
  • Keep for at least 4 years (IRS can audit 3 years back)
  • Back up to cloud storage
  • Many accounting software platforms store them for you

Common Mistakes

Mistake #1: Not Getting a W-9 Before Paying: You’re scrambling in January trying to get tax info from someone you haven’t worked with in 6 months. They’ve changed emails. They don’t respond. You miss the deadline.

Mistake #2: Paying Contractors via Personal Credit Card: If payments come from personal accounts, they don’t show up in the business accounting system, and you forget to issue 1099s.

Mistake #3: Assuming LLCs Don’t Need 1099s: Single-member LLCs (taxed as sole proprietors) DO need 1099s. Only corporations are exempt. Check the W-9 to be sure.

Mistake #4: Forgetting About Law Firms: Even if they’re incorporated, law firms always get 1099s. It’s a special exception.

Mistake #5: Not Tracking Payments Under $600: Someone you paid $400 in 2025 might get $300 in January 2026. Now they’ve crossed $600 for the year. Track all contractor payments.

Note: This article 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.

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