Hiring Freelancers? Here’s What You Must Send to the IRS

Freelance positions in the workforce have reshaped the way companies function. Whether you're a small business owner, a startup founder, or someone who occasionally engages independent contractors for specialized projects, it's essential to know your income reporting obligations. The IRS closely monitors payments to contractors, and failing to submit the correct forms promptly can lead to hefty fines.

Utilizing services like 1099 DA outsourcing can simplify this process, ensuring you stay compliant. This guide details exactly what you need to file with the IRS when working with freelancers and other non-employee providers, explains why it’s important, and offers tips to help you avoid costly errors.

Why You Must Report Payments to Freelancers

When you hire someone who is not an employee - such as a freelance writer, designer, consultant, or virtual assistant - you are required by the IRS to report how much you paid them if certain conditions are met. This isn’t just about transparency; it’s about ensuring that income is properly taxed.

The IRS uses this information to verify that individuals are correctly reporting their earnings on their own tax returns. If you don’t report it, and the freelancer doesn’t either, that’s tax evasion and it can trigger audits and fines for both parties.

Who Must Report Payments?

Generally, any business entity, nonprofit, or individual operating a trade or business must report payments made to independent contractors if the amount is $600 or more in a calendar year.

This includes:

• Sole proprietors
• LLCs
• Corporations (in some cases)
• Nonprofit organizations
• Landlords or real estate managers
• Gig economy platforms and apps

Even if you’re a small business with no payroll, if you hire a contractor and pay them over $600 for their work in a given year, you’re obligated to report it.

What You Need to Send to the IRS: The Basics

The main form you’ll need to file is the Form 1099-NEC—which stands for “Non-Employee Compensation.” This form was reintroduced in 2020 and replaced the older use of 1099-MISC for contractor payments.

Form 1099-NEC must be filed if:

• You paid $600 or more to a freelancer or independent contractor for services.
• The recipient is not your employee.
• The payment was made in cash, check, bank transfer, or other direct methods (non-credit card).

Note: If you paid them via a credit card, PayPal, or other third-party platform, those services are responsible for issuing their own payment reports (via Form 1099-K).

Information You’ll Need from the Contractor

Before you can issue a 1099-NEC, you’ll need the contractor to fill out Form W-9, which provides their:

• Full name or business name
• Taxpayer Identification Number (TIN) or Social Security Number (SSN)
• Address
• Federal tax classification (individual, LLC, corporation, etc.)

Tip: Always request a completed W-9 before you issue the first payment. This ensures you’re prepared when filing season arrives and prevents delays in processing.

How and When to File

Here’s a step-by-step overview of what to do once you’ve hired and paid a freelancer during the year:

• Track Payments Accurately
• Maintain accurate records throughout the year using accounting software or spreadsheets. Categorize all freelancer and contractor payments separately from employee wages.
• Prepare and Send Form 1099-NEC

You must complete three copies of the form:

Copy A: Sent to the IRS (electronically or via mail)

Copy B: Sent to the contractor

Copy C: Kept for your records

Meet the IRS Deadlines

January 31: Send Copy B to the contractor and file Copy A with the IRS (both electronically and paper filers)

If you’re mailing in the form, send it with Form 1096 as a cover sheet.

How to File Electronically

The IRS strongly encourages electronic filing, especially if you're submitting 250 or more forms, but even for fewer, it’s often quicker and more efficient.

Use:

IRS FIRE (Filing Information Returns Electronically) system

An authorized e-file provider or tax software like QuickBooks, Tax1099, or Track1099

What Happens If You Don’t File?

Failure to file Form 1099-NEC correctly or on time can result in:

Late filing penalties: Ranging from $60 to $310 per form, depending on how late you are

Intentional disregard penalties: As high as $630 per form, with no cap

IRS audits and increased scrutiny: If patterns of non-compliance appear

These penalties can quickly add up, especially if you hire multiple contractors.

Exceptions to Be Aware Of

Not all payments require reporting. For instance:

• Payments made to C corporations or S corporations are generally exempt (unless for legal or medical services).
• Employee wages are reported on W-2, not 1099-NEC.
• Product purchases or payments for goods are not reported - only services.
• Rental payments to property managers may follow different rules depending on business structure.

Still unsure if a payment qualifies? When in doubt, consult a tax professional.

Best Practices for Staying Compliant

Here are a few simple tips to help you stay organized and avoid last-minute stress:

• Collect W-9s upfront before the first payment
• Use accounting software to track vendor payments
• Review contractor totals in December so you’re not surprised in January
• Work with a bookkeeper or tax pro if you’re unsure
• File forms early and confirm mailing addresses with contractors before sending

Staying Compliant 

Hiring freelancers offers flexibility and access to specialized talent, but it also comes with tax responsibilities. The IRS wants to ensure that all income, whether from a traditional job or a side hustle, is reported and taxed appropriately. That’s where Form 1099-NEC comes in.

If you’re working with freelancers, contractors, or independent vendors, take the time to understand your reporting obligations and act early. Not only will you avoid penalties, but you’ll build a professional, trustworthy relationship with the people helping your business grow.

Need help keeping up with your reporting obligations? Consider speaking with a tax advisor or using an online service that specializes in contractor management and compliance.