Many small businesses pay people who are not employees: freelancers, consultants, subcontractors and specialists. The IRS uses information returns to track those payments, and for nonemployee compensation the form is Form 1099-NEC.

What Form 1099-NEC reports

The IRS states plainly on its About Form 1099-NEC page: use Form 1099-NEC to report nonemployee compensation. The instructions for the form, linked from that page, explain who must file, the thresholds that apply, exceptions and due dates. Because thresholds and dates can change, read the current instructions each year rather than relying on last year's.

Start with the right classification

Form 1099-NEC is for people who are not employees. Whether someone is an employee or an independent contractor depends on the relationship, not on what you call it. The IRS explains the factors on its page about independent contractors versus employees. If a worker should be an employee, they belong on payroll and receive a Form W-2 instead. Our guide to employees versus independent contractors covers this in more detail.

Collect Form W-9 before you pay

Form W-9 is used to request a contractor's taxpayer identification number and certification. Collecting it before the first payment saves time later, because chasing details from a contractor you worked with months ago is much harder. The IRS page on forms and associated taxes for independent contractors summarises the forms involved.

Track payments through the year

The work in January is much lighter if you have tracked contractor payments all year. In practice:

  • Set each contractor up as a vendor in your bookkeeping system with their W-9 details
  • Mark vendors who may need a 1099 so reports can filter them
  • Record payments to the contractor's vendor record, not just to an expense account
  • Note how each payment was made, because the instructions treat some payment methods differently

At year end you can run a report of totals by contractor and compare it with the current filing rules.

Common problems

  • Missing or incomplete W-9s
  • Contractors paid from personal accounts or apps and never recorded
  • Payments to one contractor split across several vendor records
  • Reimbursed expenses mixed with fees without a clear record

What to keep

Keep the W-9, invoices, payment records and copies of any information returns filed. The IRS explains retention periods in how long should I keep records.

A year-round checklist

  1. Request a W-9 before the first payment to any new contractor.
  2. Set the contractor up as a vendor with the details from the W-9.
  3. Record every payment against that vendor, including payments made through apps.
  4. Keep invoices with payments so fees and reimbursed expenses can be told apart.
  5. Each quarter, run a vendor payment report and check for missing W-9s.
  6. Early in January, read the current Form 1099-NEC instructions and compare them with your totals.
  7. Keep copies of everything filed with the year's records.

Following this routine through the year means January becomes a review of totals you already trust, rather than a search through emails and bank statements for contractor details.

How we help

We keep contractor records and payment totals up to date as part of our payroll services and bookkeeping services, so year-end forms can be prepared from clean data.