Small Business Guide to Form W-2 and Form 1099-NEC – Part 3: Reporting Nonemployee Compensation on Form 1099-NEC

Form 1099-NEC (Nonemployee Compensation) is used to report independent contractors’ compensation to the IRS. As a business owner, it’s important to ensure your independent contractors are correctly classified or you could be subject to costly fines and penalties. According to the IRS, you have an independent contractor relationship if these four conditions are met:

• You made the payment to someone who is not your employee.
• You made the payment for services performed for your trade or business (including government agencies and nonprofit organizations).
• You made the payment to an individual, partnership, estate, or, in some cases, a corporation.
• You made payments to the payee that met the threshold for that year. In 2025, the threshold is $600. In 2026, it will increase to $2,000 and be adjusted annually for inflation thereafter.

Your business must file IRS Form 1099-NEC form (Nonemployee Compensation) each year to report payments for services performed by independent contractors for your business. The 1099-NECs must also be made available to independent contractors—in person, by mail, or online—so they can report them on their federal, state, and local income tax returns.

When working with independent contractors, your business does not pay a share of the entity’s federal income tax, Social Security, or FICA withholding. The entity pays self-employment taxes. However, if an independent contractor is subject to backup withholding, you must report the amount of federal taxes withheld on a 1099-NEC.

Who Receives a 1099-NEC

• An individual, partnership, estate, or corporation who is not an employee that is paid at least $600 during the year for performing services for a business.
• An entity that is subject to backup withholding of federal taxes, regardless of the amount of the payment received.

Key Information on Form 1099-NEC

• Contracting business or individual’s information, including name, address, telephone number, and Taxpayer Identification Number (TIN), which is usually an Employer Identification Number (EIN).
• Independent contractor’s information, including name, address, telephone number, and Taxpayer Identification Number (TIN), which is usually their Social Security number or EIN if they operate as a business entity (like an LLC or corporation).
• Total amount of nonemployee compensation (NEC) of $600 or more for services performed as a nonemployee and other forms of compensation for services. Note: The $600 threshold will increase to $2,000 in 2026 and will adjust annually for inflation thereafter.
• Federal, state, or local income tax that was withheld from the payments, which typically only occurs if the recipient was subject to backup withholding or if the independent contractor voluntarily requested that the payer withhold taxes.

Employer Obligations

• Ensures that the information included on each independent contractor’s Form 1099-NEC is based on compensation provided for services provided during the calendar year. For example, if the contractor performed work in December 2025, but compensation was provided in January 2026, that compensation should be included on the 2026 form.
• Distributes individual Form 1099-NECs (Copy B) to each independent contractor by January 31.
• Sends a copy (Copy A) of each 1099-NEC to the IRS by January 31.
• If required, sends a copy (Copy 1) to relevant state, city, or local tax departments.
• Keeps copies (Copy C) of 1099-NECs for at least four years.

Independent Contractor Responsibilities

• Monitors mail, email, or online sources for 1099-NEC forms (Copy B) around January 31. (Contact the business by early February if you have not received one.)
• Reviews the 1099-NEC for correct name, SSN/EIN, and address, and verifies compensation, and (if applicable) tax withholding amounts.
• Contacts business to report errors on the 1099-NEC to request a correction.
• Uses information on the 1099-NEC to complete their federal income tax return, and (if applicable) state and local tax returns.
• Retains 1099-NEC copies (Copy C) for records for at least three years from the date tax returns are filed.

How to File 1099-NEC (Nonemployee Compensation) Forms

The process for filing 1099-NECs is straightforward but can be time-consuming if you work with multiple independent contractors. Consider consulting a payroll tax expert or a professional employer organization (PEO) like G&A Partners for guidance and to help avoid mistakes and potentially costly penalties.

Step-by-Step Guide to Filing 1099-NECs

1. Determine Which Entities Need a 1099-NEC Form

In November or December, review payments from the year to determine who will receive a 1099-NEC.

• Issue and file a 1099-NEC for each independent contractor, freelancer, vendor, or service provider you paid more than the established threshold for services during the calendar year and who is not an employee. For 2025, the threshold is $600. For 2026, it increases to $2,000. It will then be adjusted annually for inflation.
• Consult the IRS website for possible exceptions from reporting, such as payments made to corporations (including LLCs taxed as S-corps or C-corps) or employees who received a W-2
  

G&A TIP: The 1099-NEC replaced Form 1099-MISC for reporting independent contractor income in 2020. The 1099-MISC is now used to report miscellaneous income such as rent or prize money.

2. Gather Data for Forms 1099-NEC

In December/early January, begin gathering information you’ll need to complete the 1099-NEC, including:

G&A TIP: Boxes 2 and 3 are not typically used when reporting nonemployee compensation. Visit the IRS website for a breakdown of each box and its purpose.

3. Prepare 1099-NECs for Filing and Distribution

Businesses are responsible for completing Forms 1099-NECs, filing them with the IRS, and distributing them to independent contractors if payments meet the threshold.

• Each Form 1099-NEC includes multiple copies to complete:
• Copy A: Submit to the IRS.
• Copy B: Provide to independent contractor to file with federal tax returns.
• Copy C: Retain for employer records.
• Copy 1: Submit (if applicable) to state, city, and/or local tax entities.
• Copy 2: Provide to independent contractor to file with state, city, and/or local tax returns.
• Employers filing with nine or fewer returns may manually or electronically complete W-2s.
• Employers with 10 or more returns must complete the forms and file electronically.

G&A TIP: Penalties for late or incorrect filings of Form 1099-NEC vary based on the size of your business, how late the form is, and the reason for failure. For example, if you file more than 31 days past the deadline on or before August 1 of the same year, the penalty in 2025 is $130 per return.

4. Distribute 1099-NECs

The deadline to provide 1099-NECs to independent contractors is January 31 of the year following the year. Distribute copies B, C, and 2 of the Form 1099-NEC to employees by hand, mail, email, or online through a secure portal.

G&A TIP: To furnish 1099-NECs to independent contractors electronically, you must first obtain their written consent. You must also inform them that you will provide a paper copy if they don’t consent to receiving it electronically.

5. File all 1099-NEC Forms With IRS

January 31 is the deadline to submit 1099-NECs to the IRS.

• Prepare Form 1096 (Annual Summary and Transmittal of U.S. Information Returns), which summarizes the total compensation amounts for all 1099-NECs your business is submitting. The totals on your 1096 must match the cumulative totals from all the 1099-NECs you are filing.
• Submit 1099-NECs (Copy A) and Form 1096 to the IRS. Returns can be e-filed through the Information Returns Intake System (IRIS) or a payroll software provider.

G&A TIP: The IRS is phasing out the use of Filing Information Returns Electronically (FIRE) system for filing taxes electronically and is planning to discontinue it in January 2027 in favor of IRIS, its newer platform.

6. File With Applicable State and Local Tax Agencies

• Submit 1099-NECs to applicable state and local tax entities. Many states participate in the Combined Federal/State Filing Program (CF/SF), which means the IRS will submit your independent contractors’ 1099-NEC form data to participating states. However, some states require a direct filing of 1099-NECs (Copy B) or a separate state transmittal form. Check with individual states for filing requirements and specific instructions for submitting 1099-NEC information.
• State and local deadlines often align with the federal January 31 deadline, but always verify with the relevant tax agencies.

7. Retain Records

• Keep copies of all 1099-NECs, 1096s, and any filing confirmations for at least four years, including copies provided to employees and copies filed with the IRS and state/local agencies.
• If you discover an error after filing, you must file a corrected 1099-NEC (check the "corrected" box on a new 1099-NEC form) and a corrected 1096 with the IRS and provide the corrected 1099-NEC to the independent contractor.

How G&A Helps Businesses With Form 1099-NEC

Spend less time navigating complex payroll tax compliance and more time growing your business with a professional employer organization (PEO) like G&A Partners. Our team of payroll tax and compliance experts supports you through the entire tax process and helps you avoid employee misclassification and other costly mistakes. Schedule a consultation today to learn more.