The 1099-NEC rule just changed — here's what you actually owe
The reporting threshold for Form 1099-NEC jumped from $600 to $2,000 in 2026 under the One Big Beautiful Bill Act, signed into law on July 4, 2025. That cuts millions of 1099 filings out of the system — but it doesn't excuse you from the rest of the rules, and it doesn't apply retroactively to 2025 payments, which were reportable at the $600 threshold on forms due February 2, 2026.
This guide covers who gets a 1099-NEC, who doesn't, the three exceptions that catch business owners off-guard, and the penalties for skipping the form when you shouldn't.
What 1099-NEC reports and the new $2,000 threshold
Form 1099-NEC reports nonemployee compensation — what you paid to people who provided services to your business but were not on your payroll. Independent contractors, freelancers, consultants, designers, bookkeepers, virtual assistants, and tradespeople all fall into this bucket if they're not your employees.
The threshold counts cumulative payments across the calendar year, not per invoice. Pay a designer $800 in March and $1,300 in October — total $2,100 — and you owe them a 1099-NEC. Starting in 2027, the $2,000 figure adjusts annually for inflation.
One thing the new threshold doesn't change: every dollar you paid is still deductible as a business expense, and every dollar the contractor received is still taxable income to them. The 1099 is an information return — its job is to tell the IRS what changed hands. The income tax obligation exists regardless of whether the form gets filed.
Who gets a 1099-NEC vs. who doesn't
The single biggest source of confusion is the recipient's entity type. The form covers some entities and exempts others, with three sharp exceptions you can't afford to miss.
• Single-member LLCs (disregarded entities)
• Partnerships and multi-member LLCs taxed as partnerships
• Estates
• Attorneys and law firms (any structure, including corporations)
• Medical and health care providers (any structure, including corporations): on Form 1099-MISC, Box 6, not 1099-NEC
• Anyone subject to backup withholding, regardless of amount
• S corporations (general rule)
• LLCs that elected C-Corp or S-Corp tax treatment
• Tax-exempt organizations
• Government entities
• Payments processed through credit cards, debit cards, or third-party networks (PayPal, Stripe, Venmo business)
• Payments for merchandise, freight, storage, or rent paid to a real estate agent
Notice that LLC tax classification matters more than the LLC label. A single-member LLC owned by an individual gets a 1099-NEC. The same LLC, if it filed Form 2553 to be taxed as an S-Corp, doesn't. Form W-9 is how you find out which is which — that's why collecting it before paying is non-negotiable.
The three corporate exceptions that still require a 1099-NEC
Most business owners learn the rule as "you don't 1099 corporations." That's wrong by half. The IRS specifically requires 1099 reporting for these payments even when the recipient is incorporated:
- Legal services. Any payment of $600 or more (for 2025) or $2,000 or more (for 2026) to an attorney or law firm for legal services goes on Form 1099-NEC (Box 1 on 2025 forms, Box 1a on 2026 forms) — even if the firm is a C-Corp, S-Corp, or LLC taxed as a corporation.
- Medical and health care payments. Reported on Form 1099-MISC, Box 6 (not on the 1099-NEC). Applies to payments to doctors, dentists, and other providers, including incorporated practices. Common in employer-paid medical exams or businesses paying for health services on behalf of others.
- Gross proceeds paid to attorneys. Settlement payments where you write the check to a law firm in connection with a legal claim go on Form 1099-MISC, Box 10 — even if the firm is a corporation. Catches insurance payouts and employment settlements.
Why credit card and PayPal payments don't need a 1099-NEC
If you paid a contractor through a credit card, debit card, or a third-party payment network like PayPal (business), Stripe, Square, or Venmo for business — the payment processor is required to issue Form 1099-K to the contractor instead. Issuing your own 1099-NEC for the same payment would create a duplicate that overstates the contractor's income.
The 1099-K threshold under the OBBBA reverted to $20,000 in total payments AND more than 200 transactions in a calendar year. Many small contractors paid through these platforms will not receive a 1099-K — but that doesn't shift the reporting obligation back to you. The third-party network exception applies regardless of whether the processor actually issues the form. Bills paid via ACH, check, wire, or cash count toward the 1099-NEC threshold; bills paid via card or platform don't.
The W-9 process — collect before you pay
Form W-9 is how the contractor tells you their legal name, taxpayer identification number (TIN), and entity classification. The single biggest preventable problem in 1099 season is chasing W-9s in January for vendors you paid in March. Half of them won't respond. Some will be out of business.
Filing deadlines and the e-file requirement
Form 1099-NEC has the tightest deadline in the 1099 family: the same date for both copies. You must furnish a copy to the recipient AND file with the IRS by January 31. For tax year 2025 forms, the deadline shifted to February 2, 2026 (Jan 31 fell on a Saturday). For tax year 2026 forms, the deadline is February 1, 2027 (Jan 31 falls on a Sunday).
Since 2024, any filer with 10 or more total information returns across all 1099, W-2, and similar forms must e-file — this is the aggregate count, not just 1099-NECs. The legacy FIRE system accepts its last filings on November 19, 2026; after January 1, 2027, IRIS (Information Returns Intake System) is the only IRS e-file system for information returns, including prior-year returns and corrections. IRIS is free; see IRS.gov/IRIS.
Worked example — Maria's four contractors
Maria runs a Texas-based marketing consultancy as a sole proprietor. In calendar year 2026, she paid four people for services. Here's what she owes for each:
Pulse Design Co. (LLC taxed as S-Corp): $6,800 paid via check
Aaron (web developer, sole proprietor): $2,750 paid via Stripe
Brandon & Lee, P.C. (law firm, S-Corp): $2,400 paid via wire for trademark filing
- Jenna: 1099-NEC required. She's a sole proprietor over the $2,000 threshold paid by ACH (not a third-party network). Maria reports $4,200 in Box 1a.
- Pulse Design Co.: No 1099-NEC. The LLC elected S-Corp tax treatment, which exempts it from 1099 reporting under the corporate exception. Maria should still keep the W-9 documenting that election.
- Aaron: No 1099-NEC. Even though he's a sole proprietor over $2,000, the payment was processed through Stripe — that's a third-party payment network, so Stripe handles the reporting via Form 1099-K (or not, depending on Aaron's volume).
- Brandon & Lee, P.C.: 1099-NEC required. Legal services are one of the three corporate exceptions. The law firm being an S-Corp doesn't matter — payments to attorneys for legal services always get a 1099-NEC if the threshold is met.
Maria files two Forms 1099-NEC for tax year 2026: one for Jenna ($4,200) and one for Brandon & Lee, P.C. ($2,400). Both must be furnished to the recipients and filed with the IRS by February 1, 2027.
Penalties for late or missed 1099-NECs
The IRS assesses penalties per form, not per filing batch. Multiple late forms multiply the cost fast.
Filed after 30 days but before August 1: $130 per form
Filed after August 1 or not at all: $340 per form
Intentional disregard: $690 per form minimum, no annual cap
The penalties stack — if you fail to file with the IRS AND fail to furnish to the recipient, you pay the same tier twice. A small business that should have filed 10 forms but never did, caught after August 1, owes at least $3,400 in IRS penalties plus another $3,400 in recipient-furnishing penalties — $6,800 total before interest. Saying "I didn't know" doesn't qualify as intentional disregard, but ignoring a written IRS request to file or correct returns, or repeatedly missing deadlines across years, can.
Filing late or catching up on prior years
If you missed a deadline, file the late forms as soon as possible — the penalty tier is determined by when the IRS actually receives the form, not when you discover the error. For prior-year 1099s you never filed, you can still file using prior-year forms. Reasonable cause relief is available under IRS procedures if you can document why the failure happened and that you've fixed the underlying process. It is not guaranteed; outcomes depend on facts and circumstances.
Common mistakes
- Treating all LLCs as exempt. Most LLCs are not corporations for tax purposes. A single-member LLC defaults to disregarded entity; a multi-member LLC defaults to partnership. Both get 1099-NECs. Only an LLC that filed Form 8832 or Form 2553 to elect corporate treatment is exempt.
- Issuing a 1099 for credit card payments. Creates a duplicate when the processor also issues a 1099-K, and triggers IRS questions about why the contractor's reported income doubled.
- Skipping the law firm because it's a "PC" or "LLP." Legal services are reportable regardless of entity structure.
- Including reimbursed expenses in a single 1099 amount. If you reimburse a contractor for travel or supplies, you generally include the gross payment in Box 1a (Box 1 on 2025 and earlier forms). The contractor deducts those expenses on their own return. Don't try to net it out unless you have an accountable plan in place.
- Waiting until January to collect W-9s. Half your contractors will be unreachable. Collecting at onboarding takes ten minutes per vendor; collecting at year-end takes hours and burns relationships.
Frequently asked questions
You don't issue a 1099-NEC for credit card payments. The card network or payment processor reports via Form 1099-K instead. This applies even if the processor never issues a 1099-K (because the contractor didn't hit $20,000 / 200 transactions) — the obligation does not shift back to you.
It depends on tax classification. Single-member LLCs (disregarded entities) and multi-member LLCs taxed as partnerships get 1099-NECs if you paid them $2,000 or more in 2026. LLCs that elected C-Corp or S-Corp treatment via Form 8832 or Form 2553 are exempt under the corporate exception. Box 3 on the W-9 tells you the classification.
Venmo for business and Cash App for business count as third-party payment networks — those payments fall under the 1099-K structure, not 1099-NEC. Zelle is different: it's a bank-to-bank transfer rather than a payment network and does not issue 1099-Ks, so payments sent through Zelle still count toward your 1099-NEC threshold and require a form if the contractor is reportable. Personal Venmo (friends and family) used to pay for services creates a reporting gray zone — best avoided.
As a general rule, no — payments to C corporations and S corporations are exempt from 1099-NEC reporting. The three exceptions: legal services, medical and health care payments, and gross proceeds paid to attorneys (which go on 1099-MISC). If you paid a law firm or doctor's office for services, the corporate exemption doesn't apply.
Begin backup withholding at 24% on all payments, deposit it under the federal tax deposit rules, and report it on Form 945, due January 31 of the following year. Report the gross payment and the federal tax withheld on the 1099-NEC. Document your W-9 request in writing — that establishes good-faith compliance and protects you from penalties for the missing TIN.
Many states require a copy if the contractor lives or works in that state, or if state tax was withheld. Some states participate in the IRS Combined Federal/State Filing program (CF/SF), which forwards your federal filing automatically. Texas — where Maria is based — has no state income tax, so no separate Texas filing is needed. Check your state's department of revenue for specifics.
Yes. The threshold is the point at which a filing becomes mandatory — there's nothing stopping you from issuing a 1099-NEC for a $1,500 payment in 2026 if you want to maintain a consistent vendor reporting policy.
This article provides general information about US tax topics and is not a substitute for personalized advice from a qualified tax professional. Tax law changes frequently — verify current rules with a tax professional before filing or making decisions based on this content.
