Form 1099: The Complete Guide for Business Owners (2026 Update)
Every business that pays contractors, freelancers, or vendors needs to understand Form 1099 — or risk penalties that compound fast. This guide covers everything that’s changed for 2026 filing season and what you need to do.
The Two 1099s Every Business Uses
Form 1099-NEC (Non-Employee Compensation)
1099-NEC is the form you file when you pay a non-employee $600 or more during the calendar year for services. This includes:
- Freelancers and independent contractors
- Consultants and advisors
- Any individual or single-member LLC providing services to your business
The $600 threshold applies per payee per year. If you paid a contractor $400 in Q1 and another $250 in Q3, that’s $650 total — you owe a 1099-NEC.
Who doesn’t get a 1099-NEC: Corporations (C-Corps and S-Corps) are generally exempt from 1099-NEC requirements — but attorneys and law firms are a notable exception: they get a 1099 regardless of corporate structure.
Deadline: 1099-NEC must be filed with the IRS and provided to recipients by January 31 (no grace period — this is earlier than other 1099s).
Form 1099-MISC (Miscellaneous Information)
1099-MISC covers payments that don’t fit the NEC category:
- Rent paid to landlords ($600+)
- Prizes and awards ($600+)
- Medical and healthcare payments ($600+)
- Royalties ($10+)
1099-MISC has a later deadline: provide to recipient by January 31, file with IRS by February 28 (paper) or March 31 (electronic).
The 1099-K: What Changed for 2025 Returns
The 1099-K has been the source of the most confusion in recent years. Here’s where things stand for 2025 returns (filed in 2026):
The phased threshold reduction:
- 2023: $600 threshold was delayed — original $20,000/200 transaction rule stayed
- 2024: $5,000 threshold (first year of the phase-down)
- 2025: $2,500 threshold — effective for returns filed in 2026
- 2026+: $600 threshold (full implementation)
What this means: If you process payments through Stripe, PayPal, Venmo Business, Square, or any other third-party payment network, expect to receive a 1099-K for 2025 if your transactions exceeded $2,500. This is a significant decrease from the $5,000 threshold that applied to your 2024 return.
The critical nuance: A 1099-K reports gross payments — including refunds you later processed. You can’t just take the 1099-K number and call it income. You need to reconcile the gross amount on the 1099-K against your actual recognized income, net of returns, refunds, and adjustments.
New for 2026: Form 1099-DA (Digital Assets)
Starting with the 2025 tax year, the IRS introduced Form 1099-DA for reporting digital asset transactions. If your business accepts cryptocurrency as payment, or if your business holds and transacts in digital assets, your broker or exchange may now be required to issue you a 1099-DA.
What it covers: Proceeds from sales or exchanges of digital assets, including cryptocurrency, NFTs, and other digital property. This is still in early implementation — the full broker reporting requirements are being phased in over 2025-2026.
Collecting W-9s Before You Pay
The most common 1099 failure isn’t the form itself — it’s not having the information to fill it out. Collect a signed W-9 from every contractor, vendor, or service provider before you issue the first payment. A W-9 gives you:
- Legal name and entity type
- Tax ID number (SSN or EIN)
- Address
- Certification of US person status
If a contractor refuses to provide a W-9, you’re required to withhold 24% backup withholding from all payments and remit it to the IRS. Most contractors will provide a W-9 quickly when you explain the alternative.
For foreign contractors who perform services outside the US: collect a W-8BEN (for individuals) or W-8BEN-E (for entities). These certify non-US person status and generally exempt you from 1099 requirements and backup withholding.
2026 Penalties for Missing or Late 1099s
The IRS takes 1099 compliance seriously. Penalties increase based on how late you file:
| Timing | Penalty per Form |
|---|---|
| Filed within 30 days of deadline | $60 / form |
| Filed 31 days late through August 1 | $130 / form |
| Filed after August 1 or not at all | $330 / form |
| Intentional disregard | $660 / form (minimum) |
Annual caps apply per business, but the per-form penalties add up fast when you have dozens of contractors. A 50-contractor roster where every 1099 is filed after August 1 creates $16,500 in potential penalties.
The “intentional disregard” category is important: If the IRS determines you knew you had a filing obligation and chose not to file, the cap on penalties is removed and criminal penalties can apply.
Common 1099 Mistakes Acuity Sees
1. Filing a 1099-NEC for payments to a corporation. Corporations don’t receive 1099-NECs in most cases — but if you didn’t collect a W-9, you don’t know you’re paying a corporation. Always collect a W-9.
2. Forgetting reimbursements mixed into payments. If you pay a contractor $4,000 for work and $1,200 for expense reimbursements in the same check, you may only owe a 1099 on the $4,000. Separate compensation from reimbursements clearly.
3. Relying on payment apps’ 1099-Ks instead of tracking actual payments. Your payment app’s 1099-K is not a substitute for your own payment records. The numbers often differ due to gross vs. net reporting differences.
4. Missing the January 3a1 deadline for 1099-NEC. There’s no grace period. Extensions for the 1099-NEC are extremely limited — file on time.
5. Not filing for payments to LLCs. Single-member LLCs and multi-member LLCs (without S-Corp election) should receive 1099-NECs just like individual contractors. The LLC classification matters.
How to Efficiently Handle 1099s at Year-End
By December 15 each year:
- ☐ Review all contractor payments for the year — run a vendor payment report from your accounting software
- ☐ Verify you have a current, signed W-9 on file for everyone above $600
- ☐ Flag any payments that may be missing documentation
By January 15:
- ☐ Prepare 1099-NEC forms for all qualifying payees
- ☐ Verify recipient addresses against W-9 records
By January 31:
- ☐ File 1099-NECs with the IRS (electronically or paper)
- ☐ Send copies to all recipients
Filing threshold: Businesses filing 10 or more information returns (1099s, W-2s combined) are required to file electronically. Most small businesses should use an e-file service — the IRS FIRE system, or a payroll/accounting provider that handles 1099 e-filing directly.
Frequently Asked Questions
Do I need to send a 1099 to every contractor I paid this year?
Not every contractor — but most individuals you paid $600 or more for services during the year. The key exemptions: corporations (C-Corps and S-Corps) are generally exempt from 1099-NEC requirements. Payments made via credit card or a third-party payment network like PayPal are reported on a 1099-K by the payment processor, not by you on a 1099-NEC. Attorneys and law firms are an exception — they receive 1099-NECs regardless of their corporate structure. The practical process: collect a W-9 from every contractor before the first payment. The W-9 tells you their tax classification and whether they’re exempt from 1099 reporting.
What happens if I missed the January 31 1099-NEC deadline?
File as quickly as possible — penalties for late 1099-NEC filing increase over time. Filing within 30 days of the deadline carries a $60/form penalty; filing between 31 days late and August 1 is $130/form; filing after August 1 or not at all jumps to $330/form. There’s no automatic extension for 1099-NECs the way there is for some other forms. Beyond the financial penalties, the practical risk is that contractors who don’t receive their 1099-NEC may underreport their income, creating IRS inconsistencies that trace back to your filing. File late rather than not at all — the IRS takes actual filing, even late, as evidence you’re trying to comply.
I paid a contractor via PayPal — do I still need to send a 1099-NEC?
Generally no, if the payment was made through a third-party payment network that issued or will issue a 1099-K. The payment processor (PayPal, Stripe, Venmo Business) is responsible for reporting those payments via 1099-K to the contractor. Your 1099-NEC responsibility is typically satisfied. However: if you paid via PayPal Friends & Family (which avoids the payment processor’s reporting), the responsibility shifts back to you. The safest approach: collect W-9s from all contractors regardless of payment method, track whether payments are via business payment networks, and consult your accountant on contractor payments above $600 to confirm who bears the reporting obligation.
What is backup withholding and when do I have to do it?
Backup withholding requires you to withhold 24% of payments to a contractor and remit it to the IRS when certain conditions are met — primarily when the contractor hasn’t provided a valid TIN (taxpayer identification number) or W-9, or when the IRS notifies you that the TIN they provided is incorrect. Backup withholding is essentially a penalty mechanism for non-compliance — it’s not something you do routinely, only when the W-9 requirement hasn’t been satisfied. The practical prevention: always collect a signed W-9 before the first payment. Most contractors will provide one immediately when you explain the alternative (you withhold 24% and send it to the IRS). Once you have a valid W-9 on file, backup withholding doesn’t apply.
I received a 1099-K from Stripe that's higher than my actual revenue — what do I do?
This is extremely common, and you should not report the 1099-K amount as your income if it’s higher than your actual revenue. 1099-Ks report gross payments processed — before refunds, chargebacks, and adjustments — which often exceeds your actual recognized revenue. The correct approach: report your actual revenue on your tax return, not the 1099-K amount. You’ll need documentation to support the difference. Run a reconciliation showing: 1099-K gross amount minus refunds processed minus chargebacks minus any amounts that were erroneously included = actual revenue. Keep this reconciliation in your records in case of IRS inquiry. Your accountant should document this reconciliation as part of your tax preparation process.