You pay an independent contractor (often called a “1099 employee”) by collecting their tax information upfront, paying them directly for their work without withholding taxes, and then reporting those payments to the IRS on Form 1099-NEC at year’s end. Unlike a W-2 employee, you don’t run payroll, withhold income tax, or pay employer-side Social Security and Medicare taxes. The contractor handles their own taxes.
The term “1099 employee” is actually a contradiction. If someone is truly your employee, they get a W-2 and you withhold taxes. A 1099 worker is an independent contractor, not an employee. The distinction matters legally, and getting it wrong can trigger back taxes, penalties, and interest.
Make Sure the Worker Is Actually a Contractor
Before you pay anyone as a 1099 worker, confirm they genuinely qualify as an independent contractor. The IRS uses a straightforward principle: if you control only the result of the work, not how or when it gets done, the person is likely a contractor. If you control the details of how the work is performed, set their hours, provide their tools, and direct their day-to-day tasks, that person is an employee regardless of what your contract says.
Misclassifying an employee as a contractor is one of the most common and costly mistakes small businesses make. If the IRS or a state labor agency reclassifies your contractor as an employee, you could owe all the payroll taxes you should have withheld, plus penalties. When in doubt, the IRS lets you file Form SS-8 to request an official determination.
Collect a W-9 Before You Pay
Before sending any money, ask the contractor to fill out Form W-9. This is a simple one-page IRS form where the contractor provides their legal name, business name (if applicable), address, and taxpayer identification number (TIN). The TIN is usually their Social Security number for individuals or their Employer Identification Number if they operate as a business entity.
Keep the completed W-9 in your files. You won’t send it to the IRS, but you’ll need the information when it’s time to file a 1099-NEC. If a contractor refuses to provide a W-9 or gives you an incorrect TIN, you’re required to withhold 24% of every payment and send it to the IRS. This is called backup withholding, and it stays in effect until the contractor gives you a valid TIN.
Agree on Payment Terms
Unlike employees who receive a regular paycheck on a set schedule, contractors typically negotiate their own payment terms. Before work begins, put the following in writing, ideally in a simple contract or statement of work:
- Rate: Whether you’re paying a flat project fee, an hourly rate, or a retainer.
- Payment schedule: When invoices are due and how quickly you’ll pay (net 15, net 30, upon completion, etc.).
- Payment method: Check, direct deposit, wire transfer, or a third-party platform like PayPal or Venmo for Business.
Most contractors will submit an invoice for their work, and you pay that invoice according to whatever schedule you agreed on. There’s no legal requirement to pay contractors on a biweekly or monthly cycle the way there is with employees.
How to Actually Send the Payment
You can pay a contractor using any standard method: business check, direct bank transfer (ACH), wire transfer, or a third-party payment platform. There’s no IRS rule requiring a specific method. What matters for tax purposes is that you track every payment accurately.
One important detail: the way you pay affects your reporting obligations at year’s end. If you pay a contractor by check or direct bank transfer, you’re responsible for issuing a 1099-NEC. But if you pay through a third-party payment processor (PayPal, Venmo, Stripe, Square, credit card), the processor handles the tax reporting on Form 1099-K instead. You should not report the same payment on both a 1099-NEC and a 1099-K. So if you pay a contractor $5,000 through PayPal, PayPal reports that income, not you.
Many businesses use a mix of methods, paying some contractors by check and others through platforms. Just make sure you know which payments you need to report and which the platform covers.
Do Not Withhold Taxes
This is the biggest practical difference between paying a contractor and paying an employee. When you pay a 1099 contractor, you pay the full amount they invoiced. You don’t withhold federal income tax, state income tax, Social Security, or Medicare. The contractor is responsible for paying their own self-employment tax (which covers Social Security and Medicare) and making quarterly estimated tax payments to the IRS.
The only exception is backup withholding. If the contractor didn’t give you a valid TIN on their W-9, you must withhold 24% of each payment and remit it to the IRS. This isn’t optional. You report backup withholding on Form 945 at the end of the year.
Report Payments on Form 1099-NEC
After the tax year ends, you need to report contractor payments to the IRS using Form 1099-NEC (NEC stands for Nonemployee Compensation). You send one copy to the contractor and file another with the IRS. For the 2025 tax year, these forms are due to both the contractor and the IRS by January 31, 2026 (the deadline shifts to February 2, 2026, because January 31 falls on a Saturday that year).
You only need to file a 1099-NEC for contractors you paid $600 or more during the calendar year through direct methods like checks or bank transfers. Payments made through third-party platforms don’t count toward that $600 threshold since the platform files its own 1099-K.
You can file 1099-NEC forms electronically through the IRS Filing Information Returns Electronically (FIRE) system or through accounting software that supports e-filing. If you have more than a small handful of contractors, e-filing is far more efficient than paper. Many payroll and bookkeeping platforms will generate and file the forms for you automatically if you’ve been tracking payments through the software all year.
Keep Clean Records All Year
Good recordkeeping makes everything easier. For each contractor, keep a copy of their W-9, their signed contract or agreement, every invoice they submitted, and a record of every payment you made (including the date, amount, and method). If you use accounting software, create each contractor as a vendor so payments are tracked automatically.
This documentation protects you in two ways. First, it makes 1099 filing at year’s end straightforward instead of a scramble. Second, if the IRS ever questions whether a worker was properly classified as a contractor, your contract, invoices, and payment records help demonstrate the nature of the relationship.
Step-by-Step Summary
- Before work starts: Confirm the worker qualifies as an independent contractor, not an employee. Have them complete Form W-9.
- Set terms: Agree on rate, payment schedule, and payment method in a written contract.
- When paying: Pay the full invoiced amount with no tax withholding. Use check, ACH, or a payment platform.
- Track everything: Log every payment by date, amount, and method.
- By January 31 of the following year: File Form 1099-NEC for any contractor you paid $600 or more through direct methods. Send a copy to the contractor and a copy to the IRS.