If you pay independent contractors, freelancers, or certain service providers during the year, the IRS likely requires you to report those payments on Form 1099-NEC (Nonemployee Compensation). One copy goes to the recipient, and one goes to the IRS. Getting this right keeps your business compliant and avoids penalties that can add up quickly. Here is a clear breakdown of when to issue a 1099, who gets one, and what changed under the One Big Beautiful Bill Act (OBBBA) signed in July 2025.

What Is Form 1099-NEC?

Form 1099-NEC is the IRS information return used to report nonemployee compensation. Businesses use it to document payments made to individuals and entities that are not employees, including freelancers, independent contractors, consultants, and certain professional service providers. The form replaced Box 7 of the old 1099-MISC for reporting nonemployee compensation starting with tax year 2020.

The 1099-NEC reports the total amount paid to a nonemployee during the calendar year. It does not involve withholding income tax or paying employer-side Medicare and Social Security taxes, which is one of the key distinctions between contractors and W-2 employees.

When to Issue a 1099: The Reporting Threshold

You are required to issue a 1099-NEC when total payments to a single nonemployee reach or exceed the reporting threshold during a calendar year. This threshold recently changed:

  • Tax year 2025 (forms filed by February 2, 2026): The reporting threshold is $600 per payee.
  • Tax year 2026 and beyond (forms filed by January 31, 2027): The OBBBA raised the threshold to $2,000 per payee. Starting in calendar year 2027, the $2,000 figure will be adjusted annually for inflation.

For example, if your business paid a marketing consultant $1,800 during 2025, you must issue a 1099-NEC because the total exceeds $600. If you paid that same consultant $1,800 during 2026, you would not need to issue a 1099-NEC because the total falls below the new $2,000 threshold.

Important: The threshold applies to the aggregate of all payments to that payee during the calendar year, not to individual invoices. Multiple smaller payments that total $600 or more (for TY2025) or $2,000 or more (for TY2026) still trigger the filing requirement.

Who Gets a 1099-NEC?

You should issue a 1099-NEC to any person or entity you paid at or above the threshold for services performed in the course of your trade or business. This includes:

  • Independent contractors and freelancers
  • Sole proprietors
  • Partnerships and most limited liability companies (LLCs)
  • Attorneys and law firms (even if incorporated, as discussed below)

Personal payments are not reportable. You are only required to file when payments are made in the course of a trade or business. Nonprofit organizations, government agencies, and trusts of qualified retirement plans are also considered engaged in a trade or business for this purpose.

Who Is Exempt from Receiving a 1099?

Generally, you do not need to issue a 1099-NEC to:

  • C corporations and S corporations: Payments to entities taxed as corporations are exempt from 1099-NEC reporting. If a payee checks the "C corporation" or "S corporation" box on their Form W-9, no 1099-NEC is required (with exceptions below).
  • W-2 employees: Compensation to employees is reported on Form W-2, not Form 1099-NEC.
  • Payments below the threshold: If total payments to a payee stay under $600 (TY2025) or $2,000 (TY2026+), no form is required.

Key Exceptions to the Corporate Exemption

Two categories of payments must be reported regardless of the recipient's corporate status:

  • Attorney fees: Payments of $600 or more (TY2025) or $2,000 or more (TY2026) to an attorney for legal services are reported on 1099-NEC Box 1, even if the law firm is a corporation or S corporation. See IRS Instructions for Forms 1099-MISC and 1099-NEC.
  • Medical and healthcare payments: Payments of $600 or more (TY2025) or $2,000 or more (TY2026) for medical or healthcare services are reported on Form 1099-MISC Box 6, even when paid to a corporation.

Which Payment Methods Count?

When calculating the total to report on a 1099-NEC, include only payments made by:

  • Cash
  • Check
  • ACH or wire transfer
  • Other direct payment methods

Do not include payments made by credit card, debit card, or through third-party payment networks (such as PayPal, Stripe, or Venmo). Those transactions are reported by the payment processor on Form 1099-K. Under the OBBBA, the 1099-K reporting threshold reverted to $20,000 and 200 transactions per payee per year, eliminating the lower thresholds that had been proposed under the American Rescue Plan Act. For a deeper look at the evolving 1099-K rules, see our article on 1099-K threshold reporting.

The Importance of Collecting a W-9

Every contractor should provide a completed Form W-9 before they begin providing services. The W-9 collects the payee's legal name, address, taxpayer identification number (TIN), and entity classification, all of which you need to complete the 1099-NEC accurately.

If a payee fails to furnish a valid TIN, the payer must apply backup withholding at a rate of 24% on reportable payments. If you do not collect and remit backup withholding when required, you may become liable for the uncollected amount plus penalties and interest. Collecting the W-9 upfront protects you from this exposure. See IRS guidance on backup withholding for details.

Filing Deadlines for Form 1099-NEC

The 1099-NEC has one fixed filing deadline: January 31 of the year following the payment year. This applies whether you file on paper or electronically. Both the recipient copy and the IRS copy are due on the same date.

  • TY2025: January 31, 2026 falls on a Saturday, so the deadline shifts to Monday, February 2, 2026.
  • TY2026: January 31, 2027 falls on a Sunday, so the deadline shifts to Monday, February 1, 2027.

Note: If you file 10 or more information returns during the calendar year, the IRS requires you to file electronically.

Penalties for Not Filing a 1099-NEC

The IRS imposes penalties on businesses that fail to file correct 1099-NECs by the deadline. For tax year 2025:

  • $60 per form if filed within 30 days of the deadline
  • $130 per form if filed more than 30 days late but by August 1
  • $340 per form if filed after August 1 or not filed at all
  • $680 per form (no maximum) for intentional disregard of the filing requirement

Small businesses (average annual gross receipts of $5 million or less for the three most recent tax years) have reduced maximum penalties per year. These penalty amounts are indexed and may increase for future tax years. See IRS penalty information for the current schedule.

Arizona Considerations for 1099 Reporting

Arizona generally conforms to federal 1099 reporting requirements. If you operate a business in Arizona, keep in mind:

  • State reporting: Arizona requires payers to submit 1099 information to the Arizona Department of Revenue (ADOR) when Arizona income tax has been withheld. Combined federal/state filing through the IRS program satisfies this requirement for most filers.
  • Backup withholding: Federal backup withholding at 24% applies. Arizona does not impose a separate state-level backup withholding on 1099-NEC payments.
  • Worker classification: Arizona follows federal guidelines for distinguishing employees from independent contractors. Misclassifying an employee as a contractor can trigger both federal and state penalties, including payroll tax liability.

Frequently Asked Questions

Do I need to issue a 1099 to an LLC?

It depends on the LLC's tax classification. If the LLC is taxed as a sole proprietorship (single-member) or as a partnership (multi-member), you must issue a 1099-NEC when payments meet the threshold. If the LLC has elected to be taxed as an S corporation or C corporation, the general corporate exemption applies (no 1099 required, except for attorney fees and medical payments).

What if I paid a contractor less than the threshold?

You are not legally required to file a 1099-NEC for payments below $600 (TY2025) or $2,000 (TY2026+). However, the contractor is still required to report the income on their tax return regardless of whether they receive a 1099.

What if I forgot to issue a 1099?

File the form as soon as possible. Late filing penalties increase the longer you wait, so prompt action reduces your exposure. If you discover the error after the filing deadline, file the 1099-NEC with the IRS and send the recipient copy immediately.

Can I issue a 1099 even if I am not required to?

Yes. You may voluntarily file a 1099-NEC for payments below the threshold. Some businesses issue 1099s for all contractor payments as an internal best practice for record-keeping.

What is the difference between a 1099-NEC and a 1099-MISC?

Form 1099-NEC reports nonemployee compensation (payments for services). Form 1099-MISC reports other types of miscellaneous income, including rent, royalties, prizes, and medical/healthcare payments. Since tax year 2020, nonemployee compensation is reported exclusively on the 1099-NEC.

How K&R Taxes Can Help

Tracking contractor payments, collecting W-9s, and filing 1099s on time takes organization throughout the year, not just at the January 31 deadline. At K&R Taxes, we help Arizona business owners stay compliant with federal and state reporting requirements, including 1099-NEC preparation and filing.

Whether you need help understanding the new $2,000 threshold for 2026, cleaning up prior-year filings, or building a year-round system to collect W-9s from every contractor, our team is here to help. We also assist with IRS representation if you are facing penalties for missed filings. Contact us or call 480-294-4967 to get started.