Form 1099 Reporting: When to Issue, Which Type, and the Penalties for Not Filing

Form 1099 reporting is one of the most commonly overlooked compliance obligations for small businesses. Any business that pays $2,000 or more (for payments made in 2026; $600 for 2025) to an individual, partnership, LLC (taxed as sole prop or partnership), or estate for services must issue Form 1099-NEC by January 31 of the following year. The 1099-NEC reports the total payments to the recipient (who uses it to report income on their tax return) and to the IRS (which cross-references it against the recipient’s return). Payments to corporations (including S-Corps and C-Corps) generally do NOT require a 1099, with important exceptions: attorney fees (all attorneys, regardless of entity type) and medical/health care payments always require 1099 reporting. The failure-to-file penalty ranges from $60 to $340 per form for returns due in 2026, depending on how late the filing is, and intentional disregard costs at least $680 per form (or 10% of the amounts that should have been reported, if greater).

How does 1099 compliance work for trades?

What are the penalties for failing to file 1099s?

The penalty for failing to file a correct information return (including 1099-NEC and 1099-MISC) is $60 per return if filed within 30 days of the due date, $130 if filed after 30 days but by August 1, and $340 per return if filed after August 1 or not at all (amounts for returns due in 2026). Small businesses (average annual gross receipts of $5 million or less) get lower annual maximums, not lower per-return amounts. If the failure is due to intentional disregard of the filing requirement, the penalty increases to the greater of $680 per return or 10% of the amounts that should have been reported, with no maximum. You must also furnish the payee statement (the recipient’s copy) by January 31, and a separate penalty schedule applies for failure to do so. The backup withholding rules (IRC 3406) require you to withhold 24% from payments to any payee who fails to provide a valid TIN on Form W-9.

Do I need to provide benefits to independent contractors?

No. Independent contractors are not entitled to employee benefits such as health insurance, retirement plan participation, paid leave, or workers’ compensation coverage. Providing benefits typically associated with employment can actually be evidence of an employment relationship in a classification dispute. You can offer higher pay rates to contractors to account for their self-funded benefits, and this is standard practice. Some companies offer contractor access to group purchasing benefits (insurance pools, equipment discounts) through third-party platforms, which is generally acceptable as long as participation is optional and not a condition of the engagement. If you provide training, set schedules, or furnish equipment, those factors weigh more heavily toward employee status than benefit offerings.

Can a general contractor pay W-2 crew bonuses on a 1099?

It shouldn’t. Under Rev. Rul. 2025-3, when a business already treats someone as an employee and pays them extra amounts, such as bonuses, outside payroll, the IRC 3509 reduced rates and Section 530 relief don’t apply to those payments. If the IRS catches it, there’s no discount on the withholding and FICA that should have come out.

A real subcontractor is a different case, like the plumbing or concrete subs in the example above. For someone you’ve always treated as a non-employee, a reclassification is figured at 3509’s 1.5% of wages and 20% of employee FICA, or 3% and 40% if the required 1099s weren’t filed and there was no reasonable cause. Intentional disregard removes those rates too.

For those true subs, the 1099-NEC threshold is $600 for payments made in 2025 and $2,000 for payments made in 2026.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.