If you pay anyone who is not on payroll — a subcontractor, a designer, a part-time helper — you have a classification question and a reporting obligation. Both are easier to handle in June than in January.
The difference in plain terms
A W-2 employee works under your direction: you control when, where, and how the work gets done, and you withhold taxes and typically provide tools. A 1099 contractor runs their own business: they set their own methods and hours, use their own tools, usually serve multiple clients, and handle their own taxes.
The distinction is decided by the facts of the relationship, not by what the agreement calls it. Misclassification carries real consequences, and the tests the IRS and states apply differ — this is a good question to put to a professional rather than guess at.
What you generally have to file
- Collect a W-9 from every contractor before you pay them the first time. This gets you their legal name, entity type, and taxpayer ID.
- Issue a 1099-NEC to contractors you paid at or above the IRS reporting threshold for the year — historically $600 for services, though thresholds have been changing, so confirm the current figure.
- Payments made through payment cards or certain third-party networks are typically reported by the processor instead, so watch for double reporting.
- File copies with the IRS by the annual deadline, generally at the end of January.
Why January goes badly
Not because the forms are hard. Because in January you are trying to reconstruct which of forty vendor payments were services versus materials, and chasing W-9s from a subcontractor who stopped answering in October.
The year-round habit
Three rules. First: no W-9, no payment — collect it with the first invoice, every time. Second: tag contractor payments as contract labor the week they happen, not at year end. Third: check the running total each quarter so nobody quietly crosses the reporting threshold unnoticed.
That is roughly ten minutes a quarter, and it turns January filing into printing a list.
Keeping the list current
LedgerFast's Tax Organizer includes a 1099 tracker that keeps a running total per contractor and flags who is approaching the reporting threshold and who is still missing a W-9 — alongside your Schedule C category totals and a CPA hand-off checklist. Plans from $49/month, first month free.
Disclaimer
This article is general information, not tax, legal, or employment advice. LedgerFast is not a CPA firm or a law firm and does not prepare or file information returns on your behalf. Worker classification rules and 1099 reporting thresholds change and vary by federal and state law — consult a qualified tax professional or attorney about your specific arrangements. Tracking features are recordkeeping aids and do not constitute a determination of worker status or filing obligations. Use of LedgerFast is governed by our Terms of Service.