1099 Compliance for Contractors: What Business Owners Need to Know

Every January, we receive calls from business owners asking the same question:

Unfortunately, many business owners don't think about 1099 reporting until year-end, which can create unnecessary stress, penalties, and a lot of scrambling to track down vendor information.

The good news is that staying compliant is relatively straightforward if you establish the right process from the beginning.

Why 1099 Compliance Matters

The IRS uses 1099 reporting to verify income reported by contractors and vendors.

Failure to issue required forms can result in penalties and create unnecessary issues during an IRS examination.

More importantly, it often signals weak accounting procedures within the business.

One of the first things we review when onboarding a new client is whether they have a process in place to identify vendors who may require a 1099.

More often than not, the answer is no.

A Real-Life Example

Imagine a contractor hires several subcontractors throughout the year.

The subcontractors are paid regularly, work on multiple projects, and receive tens of thousands of dollars in payments.

Fast forward to January.

The contractor realizes no W-9s were collected, nobody knows which vendors require a 1099, and several subcontractors are no longer responding to phone calls or emails.

Now what should have been a simple filing process turns into a compliance nightmare.

We've seen this happen countless times, and it is completely avoidable.

Who Needs a 1099 in 2026?

Generally speaking, businesses may be required to issue Form 1099-NEC when they pay a non-employee for services performed in the course of business.

Beginning in 2026, the reporting threshold increased from $600 to $2,000 per vendor, and the threshold will continue to be adjusted periodically for inflation.

Common examples include:

• Independent contractors

• Subcontractors

• Consultants

• Freelancers

• Marketing professionals

• Website developers

• Virtual assistants

• Bookkeepers

• Coaches and advisors

• Certain repair and maintenance vendors

• Healthcare professionals providing contracted services

If you're paying someone for services and they are not your employee, it's worth reviewing whether a 1099 may be required.

Who Is Usually Exempt?

This is where many business owners get confused.

Not everyone receives a 1099.

Corporations

Most payments made to S-Corporations and C-Corporations are exempt from 1099 reporting.

This is one reason obtaining a completed Form W-9 before making payment is so important. The W-9 tells you how the vendor is taxed and whether reporting may be required.

Payments Made by Credit Card or Third-Party Processors

If you paid a vendor through:

• Credit card

• PayPal

• Stripe

• Square

• Venmo Business

• Other third-party payment processors

you generally do not issue a 1099-NEC.

Those transactions are typically reported separately through Form 1099-K by the payment processor.

Employees

Employees never receive a 1099.

Employees receive a W-2.

Misclassifying employees as independent contractors can create significant payroll tax issues, penalties, and compliance concerns.

The Exception That Surprises Everyone

Attorneys.. 

Even when a law firm is incorporated, payments for legal services are often still reportable.  This catches many business owners off guard because corporations are generally exempt.  When in doubt, legal fees should always be reviewed carefully before determining reporting requirements.

The Process We Recommend

The easiest way to stay compliant is to create a simple process from day one.

Whenever you hire a new vendor:

Step 1: Obtain a completed W-9 before issuing payment.

Step 2: Save the W-9 in your records.

Step 3: Track payments throughout the year.

Step 4: Review vendors before year-end.

Step 5: Prepare any required 1099s before the filing deadline.

Following this process eliminates most year-end headaches.

Why Buyers and Lenders Care

Many business owners are surprised to learn that 1099 compliance often comes up during due diligence.  When buyers, lenders, or investors review a company, they frequently evaluate payroll and contractor relationships.

Missing 1099s, poor documentation, or worker classification issues can create concerns and increase perceived risk.  Strong compliance procedures create confidence and demonstrate that the business is being managed properly.

Final Thoughts

1099 compliance isn't difficult.

The challenge is that many business owners wait until January to think about it. 

The best time to   for 1099 season is before the first payment is ever made.  Collect the W-9.  Maintain good records.  Review vendors throughout the year.  And when questions arise, ask before year-end—not after.

At L&L Secured Financial, we help healthcare practices, contractors, franchise owners, and growing businesses establish practical accounting procedures that reduce risk, improve compliance, and make tax season significantly less stressful.

Because the best accounting systems aren't built in January. They're built all year long.