Your startup just hit $500K in revenue. You’re scaling fast, hiring contractors for everything from design work to legal services. Then January hits, and you realize you’re not sure which contractors need 1099-NEC forms—or how to file them without triggering IRS penalties.

Too many founders treat 1099 compliance as an afterthought until they’re scrambling against January deadlines or staring at penalty notices. The reality? For 2025 filings, late forms start at $60 each, climb to $330 if filed after August, and intentional disregard can mean fines of at least $660 per form—with total exposure easily exceeding $1 million for high-growth businesses.

The new One Big Beautiful Bill Act (OBBBA) adds another twist: it permanently reverted the 1099-K threshold to $20,000 and 200 transactions and will raise the general 1099-NEC reporting threshold from $600 to $2,000 starting with 2026 payments. With penalties steep and the rules shifting, a proactive system isn’t optional—it’s part of building a fundable, scalable company.

Here’s what every startup founder needs to know about staying compliant with Form 1099 requirements in 2025.

The 1099s Startups Deal With Most

While Form 1099-NEC is the one startups file most often, it’s not the only one that matters. Here are the common types you’ll see as a founder:

• Form 1099-NEC — For payments of $600 or more to independent contractors, freelancers, and service providers.

• Form 1099-MISC — For certain other business payments, like rent, royalties, and prizes.

• Form 1099-K — Issued by third-party processors like Stripe, PayPal, or Square if a payee exceeds both $20,000 in payments and 200 transactions in a calendar year (OBBBA reset this threshold retroactively to 2022). If your vendor doesn’t hit that threshold, you may still need to issue them a 1099-NEC.

• Form 1099-INT — For interest payments of $10 or more. This can apply if your company borrows money from a founder or other shareholder and pays them interest.

All of these forms serve the same purpose: to make sure the IRS knows about payments your business made that weren’t reported on a W-2. This guide will focus on Form 1099-NEC because it’s the one startups are usually responsible for filing themselves, but founders should be aware of the others.

Understanding 1099-NEC Requirements for Startups

The IRS requires businesses to issue 1099 forms when they pay non-employees $600 or more during the tax year. For startups, that usually means Form 1099-NEC (Nonemployee Compensation) for contractors, but the rules have a few important twists founders often miss.

Who Gets a 1099-NEC

You must issue a 1099-NEC to any individual or unincorporated business you paid $600 or more in 2025 for services related to your business. This includes:

• Freelancers and independent contractors (developers, designers, marketers, engineers, writers, etc.)

• Consultants and advisors

• Attorneys and law firms — always reportable, even if they’re incorporated

• Sole proprietors and single-member LLCs

• Partnerships and multi-member LLCs

Who Doesn't Need a 1099?

You don’t have to issue 1099s to:

• C-corporations and S-corporations, except for legal fees (always reportable)

• Employees, who instead receive W-2s

• Vendors paid less than $600 in 2025 (this rises to $2,000 for payments made in 2026)

• Payments made via third-party processors like Stripe, PayPal, or Square — but only if the vendor qualifies for a 1099-K. Under OBBBA, that means more than $20,000 in payments and 200 transactions in a year. If your vendor doesn’t meet that threshold, you may still need to issue them a 1099-NEC.

Examples:

• Paid $8,000 to a freelance developer (sole proprietor) → 1099-NEC required

• Made twelve $100 payments to a design agency (multi-member LLC) → 1099-NEC required

• Paid $15,000 to a legal firm (corporation) → 1099-NEC required, because legal fees are always reported

International Contractors

Most foreign contractors don’t get a 1099. Instead, they provide a W-8BEN (individuals) or W-8BEN-E (entities). Payments may trigger Form 1042-S reporting and U.S. tax withholding if the income is considered U.S.-sourced. A treaty analysis is often needed to determine whether withholding applies — we’ll cover this in a dedicated section later.

Key Takeaways for Founders

• Don’t assume “LLC” or “incorporated” means no reporting — legal fees are the big exception.

• The $600 threshold still applies for 2025; it rises to $2,000 starting with 2026 payments.

• Third-party processors (Stripe, PayPal, etc.) don’t cover everything — if your contractor doesn’t hit the 1099-K threshold, you’re on the hook for a 1099-NEC.

• International contractors follow a completely different reporting regime — 1042-S, not 1099.

Important Deadlines

Most startups will only deal with 1099-NEC, which is due January 31 to both contractors and the IRS. Other 1099 forms, like 1099-MISC, have later filing deadlines (Feb 28 by paper, Mar 31 electronically), but those situations are less common.

Because Form 1099-NEC has the same due date for both recipient copies and IRS filing, the safe move is to start preparing in December, not January. That way, you’re not chasing down W-9s or scrambling at the last minute.

What Happens If You File Late?

The IRS penalty structure for 2025 filings looks like this:

(SMB = small business, defined as average annual gross receipts under $5 million for the prior three years)

Key Takeaway from Town’s Sr. Tax Manager:

“Don’t wait even if you’ve fallen behind,” says Ludmila Hermanovich, Town’s Sr. Tax Manager. “The penalty clock never stops, but you can limit the damage by acting quickly. Sending forms late is always better than not sending them at all. Some businesses hope they’ll pass under the IRS radar, only to get hit with massive penalties years later — it’s always better to clean things up right away.”

New Thresholds and Changes for 2025

The OBBBA reshaped several 1099 reporting rules. Here’s what startups need to know:

• Form 1099-NEC and 1099-MISC: The reporting threshold remains $600 for 2025 payments. Beginning with payments made in 2026, the threshold increases to $2,000, and starting in 2027 it will be indexed annually for inflation.

• Form 1099-K Changes: OBBBA permanently reverted the threshold to the original $20,000 and 200 transactions, retroactive to 2022. That means a payment processor will only issue a 1099-K if both conditions are met. If your contractor doesn’t hit those numbers, you may still need to issue them a 1099-NEC.

• Mandatory E-filing: Businesses filing 10 or more information returns (combined across 1099s, W-2s, etc.) must now file electronically. Many startups hit this threshold faster than expected once payroll and contractor forms are counted together.

“Don’t assume last year’s thresholds still apply,” says Ludmila Hermanovich. “We see businesses caught off guard because they relied on outdated IRS guidance or internet chatter. With OBBBA changes, staying current isn’t optional — it’s essential to avoid penalties and keep investors confident.”

The W-9 Collection Process

A smooth 1099 filing season starts with one rule: collecting Form W-9 from every contractor - no W-9, no payment. The W-9 provides a contractor’s legal name, tax ID number, and address — the information you’ll need to issue an accurate 1099-NEC.

Best Practices for W-9 Collection

• Set a payment policy: Don’t release funds until you have a completed W-9 on file for every contractor or vendor. This policy eliminates last-minute chases in January.
  
  
  

• Bundle with contracts: Include W-9s as part of your standard onboarding documents so it becomes automatic.
  
  
  

• Store securely: Keep W-9s in your accounting software or encrypted cloud storage. These forms contain sensitive personal and business data.
  
  
  

• Validate early: Use the IRS TIN Matching system to confirm tax IDs before filing. This reduces the risk of IRS notices for mismatches.
  
  
  

Do You Need a New W-9 Every Year?

Not necessarily. A contractor’s W-9 stays valid until their information changes. That means you don’t need a fresh form every January. However, you should request a new W-9 if a contractor:

• Changes their legal name or business name

• Changes their tax ID number (EIN or SSN)

• Changes their entity type (e.g., sole proprietor becomes an LLC or corporation)

• Moves to a new address

A Startup Lesson Learned: Sarah, who runs a creative agency, waited until December to collect W-9s. Two contractors had submitted incorrect Social Security numbers, and one never responded, which delayed her filings and caused her to miss the IRS deadline.

Key Takeaway from Town’s Sr. Tax Manager

“W-9s are your insurance policy,” says Ludmila Hermanovich. “Build a clear policy — no W-9, no payment — and you’ll avoid compliance headaches later. A good system collects once, updates when things change, and keeps you ready for tax season year after year.”

Avoiding Common Startup 1099 Mistakes

Even with good systems in place, certain mistakes trip up growing businesses again and again. Here are the big ones to watch for:

Mistake 1: Mixing Business and Personal Payments

Only payments made in the course of your trade or business belong on a 1099. Paying your friend’s LLC for landscaping at your house doesn’t count — but paying them to redo your office space does.

Mistake 2: Forgetting Cash Payments

The payment method doesn’t matter. Cash, check, wire, and ACH payments over the threshold all require 1099 reporting. Founders often assume only card payments are reportable, but it’s the opposite — processors (like Stripe) handle 1099-K reporting, you handle everything else.

Mistake 3: Ignoring State Requirements

Several states (California and New Jersey among them) require direct state 1099 filings, even if you filed federally. Overlooking these rules can trigger state-level penalties that stack on top of IRS penalties.

Mistake 4: Using Wrong Form Types

Form 1099-NEC is for nonemployee compensation. Form 1099-MISC covers items like rent, royalties, and certain prizes. Form 1099-INT is for interest paid (for example, on shareholder loans). Mixing them up will generate IRS notices.

A quick quarterly review of your contractor list helps you catch issues before they snowball into penalties.

Backup Withholding (Don’t Skip This Step)

If a contractor refuses to provide a valid W-9, you can’t just move on and hope for the best. The IRS requires you to withhold 24% of their payments and send it to the IRS. This is called backup withholding, and ignoring it can create bigger headaches than filing late.

When Backup Withholding Applies

• The contractor doesn’t return a W-9

• The contractor provides an invalid or incorrect TIN (tax ID number)

• The IRS notifies you that the contractor’s TIN is incorrect

How It Works

• Withhold 24% of the gross payment

• Remit the withheld tax to the IRS, usually via Form 945 (Annual Return of Withheld Federal Income Tax), just like you would with payroll withholdings

• Report the withheld amount on Form 1099-NEC at year-end

Why It Matters: Some businesses skip backup withholding, hoping it won’t matter. But if the IRS audits, you’ll be on the hook for both the uncollected tax and the penalties. Automating payments through software like Gusto, Avalara 1099, or Deel can help — they’ll flag missing W-9s and calculate withholding for you.

International Contractors & Form 1042-S

U.S. 1099 rules don’t apply to most foreign contractors. Instead, you’ll collect a W-8BEN (individuals) or W-8BEN-E (entities) and, in some cases, report payments on Form 1042-S with an annual Form 1042 filing.

Withholding & Treaty Rules

Some payments to foreign contractors are subject to U.S. tax withholding, unless reduced or eliminated by a tax treaty. The rules are complex, and errors are costly — the IRS can hold your business liable for unpaid withholding plus penalties.

Why Startups Outsource This

Running a treaty analysis and handling 1042-S filings requires specialized expertise. Platforms like Deel, Remote, or Papaya Global make it easier by collecting W-8s, running treaty checks, and preparing 1042-S filings automatically.

“International compliance is where small mistakes become big liabilities,” says Ludmila Hermanovich. “We’ve seen businesses assume no 1099 means no reporting, only to face six-figure penalties later. If you’re paying foreign contractors, use a system that handles W-8s, treaty analysis, and 1042-S filings from day one.”

Technology Solutions for Scaling Startups

Manual spreadsheets work when you have three contractors. Once you hit 10 or 20, the risk of missing a form or misreporting skyrockets. Modern tools can take the pain out of 1099 compliance:

Accounting & Payroll Integrations

• QuickBooks, Xero, Gusto → Track contractor payments, auto-generate 1099-NECs, and sync with your payroll.

• Avalara 1099 and Tax1099 → Specialized tools that handle bulk filings, e-filing, and multi-state submissions.

Global Contractor Platforms

• Deel, Remote, Papaya Global → Built for international workforces. They collect W-8s, analyze tax treaties, calculate required withholding, and prepare 1042-S filings.

Why Technology Matters

• Automation reduces the chance of manual mistakes.

• Built-in compliance checks (TIN matching, state filings, treaty lookups) catch errors before the IRS or states do.

• Audit trails give investors confidence during due diligence.

How Town Can Help: At Town, when we prepare a startup’s tax return, we also help with the related 1099-NEC filings. That way, your filings are consistent, accurate, and integrated with your overall tax reporting.

“Technology isn’t just about saving time,” says Ludmila Hermanovich. “The right tools protect your startup from penalties and show investors you’ve built compliance into your DNA.”

Building a Compliance System That Scales

A one-off scramble in January might work your first year. But as your contractor network grows, investors, auditors, and the IRS expect to see a system — not a fire drill. Here’s how to make 1099 compliance part of your regular operations.

Annual December Review

• Run a year-end report of all vendor and contractor payments.

• Flag anyone who crossed the 1099 threshold.

• Confirm W-9s are on file and up to date.

Quarterly Check-Ins

• Review contractor lists and payment totals at least quarterly.

• Catching issues in March or June is far easier than in January.

Documentation Standards

• Keep contracts, W-9s, and payment records organized in one place.

• If you’re audited, or asked during due diligence, you’ll need a clear paper trail.

Use Technology to Automate

• Set up your accounting or payroll software to track contractor payments.

• Use alerts and reports to spot threshold crossings in real time.

What High-Growth Startups Need to Watch For

Scaling introduces added complexity that a basic compliance process can miss:

• Multi-state operations → States like California and New Jersey require direct 1099 filings, even if you file federally.

• International contractors → 1099 rules don’t apply, but W-8BEN/W-8BEN-E and 1042-S filings might. Treaty analysis may be needed.

• Equity compensation → Stock option exercises require Form 3921, with different deadlines than 1099-NEC.

• R&D credits → Contractor documentation can help support claims worth tens of thousands.

These don’t apply to every startup, but once you’re hiring across states, raising larger rounds, or building globally, compliance gets more complex — and investors will notice if you’ve overlooked it.

Professional Oversight

As your business matures, compliance should be tied directly to your tax return prep. At Town, when we prepare your return, we also handle the related 1099-NEC filings so your reporting is accurate, consistent, and ready for investor review.

When to Get Professional Help

Most startups can manage the basics of 1099 compliance with the right policies and software. But there are clear moments when it pays to bring in experts:

• You’re paying dozens of contractors annually — the filing volume alone can overwhelm internal systems.

• You operate in multiple states — with separate state filing rules and penalties that stack on top of federal ones.

• You’re preparing for a funding round or acquisition — investors and buyers scrutinize tax compliance during due diligence.

• You work with international contractors — where treaty analysis and 1042-S filings can carry six-figure risks if mishandled.

• You’ve received IRS notices or penalties — catching up correctly matters more than rushing to file.

“Startups often ask us to step in after they’ve already received an IRS notice,” says Ludmila Hermanovich. “It’s always better to involve professionals early. Clean compliance isn’t just about avoiding penalties — it’s about proving to investors that your business is ready to scale.”

Taking Action on 1099 Compliance

1099 reporting doesn’t have to be a January crisis. With a few simple steps, you can make it part of your normal financial routine:

1. Audit your vendor list — identify who crossed the $600 threshold in 2025 (and remember it rises to $2,000 for 2026).

2. Collect and update W-9s— enforce a “no W-9, no payment” policy.

3. Set up automated tracking — use accounting or payroll software to flag thresholds.

4. Run a December review — don’t wait until January to scramble.

5. Plan for international contractors — gather W-8s and consider treaty/1042-S reporting.

6. Get help when needed— if you’re multi-state, global, or prepping for a funding round, pull in professional support.

1099 compliance isn’t glamorous, but it’s foundational. Startups that stay ahead of it avoid penalties, save time, and send the right signals to investors.

Ready to streamline your startup's tax compliance? Learn more about Town's comprehensive tax services designed specifically for growing businesses, or explore our expert team that understands the unique challenges startups face.

This content is for educational purposes only and does not constitute personalized tax advice. Tax laws are complex and subject to change. Individual circumstances can vary significantly, and strategies that work for one taxpayer may not be suitable for another.