Most small businesses in the Permian use contractors before they ever hire an employee. A crew member on a job, a driver for a week, a bookkeeper, a mechanic. Paying a contractor does not involve withholding or payroll, which is why owners like it. It does involve a small amount of paperwork that has to happen in a specific order, and skipping it creates liability that lands on you, not the contractor.
First, be sure they are a contractor
The label on the check does not decide it. The IRS looks at control: who sets the hours, who provides the tools and truck, whether the worker can take other clients, whether they can profit or lose on the job, and whether the relationship is ongoing or per project. A person who works your schedule, on your equipment, only for you, indefinitely, is an employee no matter what you agreed to call them. Getting this wrong means owing both halves of the employment taxes plus penalties, and the worker can request a determination from the IRS at any time.
Before the first payment
- Get a completed, signed Form W-9. It gives you their legal name, business name if any, address, entity type and taxpayer identification number.
- Check the entity type. Payments to a corporation generally do not need a 1099-NEC; payments to an individual, a sole proprietor, a partnership or a single-member LLC do.
- Get a written agreement describing the work, the price and the fact that they are responsible for their own taxes and insurance. It does not have to be long.
- Ask for a certificate of insurance if they will be on your job sites or driving for you.
If a contractor will not give you a taxpayer identification number, you are required to withhold backup withholding, a flat percentage of every payment, and send it to the IRS. If you paid them in full without a number and never withheld, you can be held liable for the amount. The simplest protection is to not release the first check until the W-9 is in hand.
During the year
Keep a ledger per contractor: date, amount, what it was for, and how it was paid. Payments by check, cash, bank transfer or direct deposit count toward the 1099-NEC. Payments made by credit card or through a third-party payment app are reported to the IRS by the processor on a different form, so those are excluded from your 1099 total. Mixing the two is the most common reason a 1099-NEC is wrong.
Reimbursements for materials the contractor bought on your behalf are generally included in the 1099 amount unless the contractor gave you receipts and you reimbursed them exactly. Keep those receipts with the ledger.
In January
- 01Total each contractor's payments for the year, excluding card and app payments.
- 02For everyone at or above the reporting threshold for that year, prepare a 1099-NEC using the information from their W-9.
- 03Send the contractor's copy and file the IRS copy by January 31. If you have ten or more information returns in total, they must be filed electronically.
- 04Keep a copy and the W-9 for at least four years.
Frequently asked questions
The contractor says they do not want a 1099. Can I skip it?
No. The form is your obligation, not their preference. Their tax situation is their business; your penalty for not filing is yours.
I paid a contractor with a mix of cash and a payment app. What goes on the 1099?
Only the cash, checks and bank transfers. The app payments are reported by the app's processor. Keep the split in your ledger so you can show it.
Do I need a 1099 for the LLC that does my work?
It depends on how the LLC is taxed, which is what the W-9 tells you. A single-member LLC or a partnership gets one; an LLC taxed as a corporation generally does not.
We can run this for you
Contractor ledgers and January 1099s are part of our accounting and payroll work. Call (432) 257-7547 or come by 700 C Andrews Hwy in Midland. English and Spanish.
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