A real story every US founder can relate to

In January, a fast-growing US startup reached out in panic.

They had paid over $150,000 to independent contractors during the year — developers, marketers, and consultants. Everything looked fine on the surface. Payments were made on time. Books were updated.

Then came the question:

“Do we need to file 1099s for all of them?”

The answer wasn’t simple.

After a quick review, we discovered: – No W-9s collected for multiple vendors – Payments made via PayPal and Zelle assumed as “excluded” – One contractor who clearly qualified as a W-2 employee

Potential exposure? Over $20,000 in penalties.

This situation is far more common than most US businesses realize.

What is Form 1099 (and why the IRS cares so much)

Form 1099 is how the IRS tracks non-employee payments.

If your business pays independent contractors, consultants, or service providers, the IRS expects transparency. When 1099s are missing or incorrect, it raises a red flag — not just about reporting, but about worker classification and payroll compliance.

The IRS doesn’t view 1099 filing as a formality. It’s a compliance checkpoint.

Who must issue 1099s?

You generally need to issue a 1099 if: – You paid $600 or more during the year – The vendor is a US person (individual, partnership, or LLC) – The payment was for services (not goods)

Common 1099-eligible vendors include: – Independent contractors – Freelancers – Consultants – Marketing agencies – Virtual assistants

Exceptions exist — and misunderstanding them causes most errors.

The most common (and costly) 1099 mistakes

1️⃣ Not collecting W-9s upfront

Many businesses chase W-9s in January — when vendors are unresponsive.

Best practice: Collect W-9s before making the first payment.

2️⃣Assuming PayPal, Zelle, or Stripe payments are excluded

Payment method does not automatically remove 1099 responsibility.

While platforms may issue 1099-Ks, responsibility still lies with the payer to ensure correct reporting.

3️⃣ Misclassifying employees as contractors

Calling someone a contractor doesn’t make them one.

The IRS applies strict tests: – Behavioral control – Financial control – Nature of the relationship

Misclassification can trigger back taxes, penalties, and audits.

4️⃣ Ignoring state-level 1099 requirements

States like California and New York have separate filing obligations.

Federal filing alone is not always sufficient.

5️⃣ Filing late or with incorrect amounts

Late filings can cost $60–$310 per form — with no cap for intentional disregard.

1099 vs W-2: The confusion that costs businesses thousands

If your contractor: – Works fixed hours – Uses company tools – Reports to a manager – Has no other clients

You may already have a W-2 employee, not a contractor.

This is one of the biggest red flags during IRS audits.

Mini case study: How early review saved a client $18,000

A SaaS client paid 12 contractors across the US.

During a mid-year compliance review: – 3 contractors were reclassified correctly – Missing W-9s were collected – State filings were aligned

Result: ✅ Zero penalties ✅ Clean 1099 filings ✅ No year-end panic

Compliance done early is always cheaper.

1099 compliance checklist for US businesses

Before year-end, ask yourself:

• Have we collected W-9s for all vendors?
• Are vendors correctly classified?
• Are contractor payments tracked monthly?
• Have we reviewed state filing requirements?
• Do totals match accounting records?
• Are deadlines clearly planned?

If even one box is unchecked, risk exists.

How smart US businesses handle 1099s

Well-run companies don’t treat 1099s as a January task.

They: – Review vendors monthly – Align accounting with compliance – Coordinate with CPAs early – Fix classification issues before filing season

This approach avoids penalties and protects growth.

Final thought

1099 compliance isn’t just about forms.

It’s about protecting your business from unnecessary IRS exposure while building scalable financial systems.

A short review today can prevent a costly problem tomorrow.

Need help?

If your business paid US contractors this year and you’re unsure about 1099 compliance, a quick review can save thousands in penalties.