Contractor Clean-Up: W-9s, 1099s, and Penalties
You hire contractors to move your business forward—not to create a January fire drill. This is the straight-talk playbook to clean up vendor records, collect W-9s, issue the right 1099s, and dodge penalties that quietly bleed cash. I’ll keep it blunt, practical, and built so you can implement in under an hour a week.
What changed (and what didn’t) for 2025
Deadlines are hard dates. Form 1099-NEC is due to both recipients and the IRS by January 31. 1099-MISC is due to recipients by January 31 and to the IRS by Feb 28 (paper) or Mar 31 (e-file). IRS
E-file is basically mandatory. If you file 10+ total information returns (aggregate across W-2s, 1099s, etc.), you must e-file. The free IRS IRIS portal works well. IRS+1
Penalty amounts increased. For returns due in 2025, the per-form penalties are $60 (≤30 days late), $130 (by Aug 1), $330 (after Aug 1/not filed), and $660 for intentional disregard—and that’s per form, plus separate penalties for late/incorrect recipient statements. IRS
Card/app payments are not your 1099 problem. If you pay a contractor by credit card or a payment app/marketplace, the processor reports it on 1099-K. Do not duplicate it on 1099-NEC/MISC. IRS
1099-K thresholds are phasing in. For 2025, third-party platforms generally issue 1099-K at $2,500 in payments for goods/services (then $600 from 2026). That doesn’t change your rule above: card/app payments are off your 1099-NEC. IRS
The rules in plain English
When to issue 1099-NEC: Pay $600+ for services to a nonemployee (includes parts/materials supplied with the service). Attorney fees of $600+ go on 1099-NEC even if the firm is a corporation. IRS
When to issue 1099-MISC: Rents, prizes/awards, other income, medical/health care payments, and gross proceeds to attorneys (box 10) at $600+. IRS
Trade or business only. Personal payments are not reportable. IRS
Common exceptions: Generally no 1099 to corporations (C or S)—except attorneys and certain other specific cases. IRS
W-9s: your first line of defense
Non-negotiable rule: No W-9, no pay. Period.
Purpose: W-9 gives you the legal name, address, entity type, and TIN you must use on 1099s. IRS
Backup withholding if missing/incorrect: If the payee won’t give a correct TIN, you must withhold 24% from reportable payments and remit it. If you don’t, you could be liable for it. Report non-payroll withholding on Form 945. IRS
Go electronic: The IRS allows electronic W-9 collection and substitute W-9s if they include the exact certification language and signatures. IRS
Pre-file TIN matching: Use the IRS TIN Matching service (interactive or bulk) to verify name/TIN combos before filing—this reduces “B-Notices,” penalties, and backup-withholding headaches. IRS+1
Backup withholding & “B-Notice” workflow (so you don’t guess)
If you file a 1099 with a missing/incorrect TIN, the IRS may send you a CP2100/CP2100A list. Here’s what you do:
First B-Notice: Within 15 business days of the CP2100 date/receipt (whichever is later), send the First B-Notice + Form W-9 to the payee. If they don’t return a signed W-9, begin 24% backup withholding no later than 30 business days after the notice date/receipt. You can start sooner. IRS
Second B-Notice (within three years of a first): Send the Second B-Notice (but do not include a W-9). The payee must provide SSA/IRS validation (e.g., SS card or IRS Letter 147C). Continue backup withholding until proper validation arrives. IRS
Stopping withholding: You may stop within 30 days after you receive the certified W-9 or validation (rules differ for first vs. second notices). IRS
Avoiding double reporting with 1099-K (and why it matters)
If you paid by card/app, the processor files 1099-K—you don’t file 1099-NEC/MISC for those transactions. In 2025, platforms generally issue 1099-K at $2,500; in 2026 it’s $600. Your job: tag vendor payments by method (ACH/check = your 1099; card/app = not your 1099). IRS+1
The penalty math you can’t ignore
Per return (and separately, per recipient statement) for forms due in 2025:
Filed ≤30 days late: $60
By Aug 1: $130
After Aug 1 or not filed: $330
Intentional disregard: $660 (no cap in some cases)
These add up fast across dozens of contractors. IRS
A simple, repeatable 1099 system (you can stand up this week)
Step 1 — Build a clean vendor file (today)
Require W-9 before first payment. Use e-sign links in your vendor onboarding. Keep W-9s with date/time stamps. IRS
Capture entity type right. LLCs can be taxed as disregarded, partnership, or corporation—the W-9 tells you which box is checked. IRS
Add a “payment method” field for each vendor: check/ACH (your 1099) vs card/app (processor’s 1099-K). IRS
Turn on TIN Matching weekly for new vendors. IRS
Step 2 — Classify who gets which form (this week)
1099-NEC: Services $600+ (incl. parts/materials) and attorney fees. IRS
1099-MISC: Rents, prizes/awards, medical/health care, and gross proceeds to attorneys (box 10). IRS
Do not issue 1099-NEC/MISC for card/app payments. IRS
Step 3 — Track totals as you go (monthly)
Reconcile vendor payments monthly; tag the tax form, box, and state.
If you backup withheld from anyone, flag it for Form 945 and 1099 reporting even if under $600. IRS+1
Step 4 — File smart at year-end
E-file via IRIS (free). If you have 10+ total info returns, e-file is required. IRS
1099-NEC due Jan 31 to IRS and recipients. 1099-MISC to recipients by Jan 31; IRS by Feb 28/Mar 31. IRS
Paper filing? Include Form 1096 transmittal (but go e-file if at all possible). IRS
Multi-state? Check whether your state accepts the Combined Federal/State Filing data pass-through. IRS
The 30-day contractor clean-up sprint
Day 1–2: Vendor census
Pull last 12 months of spend. Export payee name, EIN/SSN, address, amount, payment method.
Day 3–5: W-9 collection
Email vendors missing W-9s with an e-W9 link (substitute W-9 allowed). Make W-9 a condition of future payments. IRS
Day 6–7: TIN matching
Run all name/TINs through IRS TIN Matching (bulk file if you have many). Resolve mismatches now. IRS
Week 2: Map the forms
Tag each vendor: NEC, MISC (box), K (card/app), or No 1099. Use the IRS instruction examples for attorneys and medical to avoid mis-boxing. IRS
Week 3: Build packets
Contractor packet (1099-NEC vendors): W-9, contract/SOW, insurance request (COI), ACH form, policy summary (see below).
Employee vs contractor sanity check for edge cases (director fees are 1099-NEC). IRS
Week 4: Lock the SOP
Write a one-page policy: “No W-9, no pay,” when to 1099-NEC vs MISC, card/app exclusion, TIN match cadence, and B-Notice/backup withholding steps with due dates. Train your AP team.
Your one-page “No W-9, No Pay” policy (copy this)
Collect and validate W-9 before first payment; electronic W-9 accepted with certification language. IRS
Run IRS TIN Match for every new vendor and quarterly for the full file. IRS
Tag payment method (ACH/check vs card/app) in the vendor master. IRS
Withhold 24% if no valid TIN (backup withholding) and deposit via Form 945 schedule. IRS
Respond to CP2100 with First/Second B-Notices on time; start/stop withholding per the rules. IRS
File 1099s by due dates; e-file via IRIS if 10+ total returns. IRS
Common mistakes (and quick fixes)
Issuing 1099-NEC for card/app payments. Don’t. That’s the processor’s 1099-K. Fix: tag by payment method now. IRS
Ignoring attorneys because they’re corporations. Attorney fees (NEC) and gross proceeds (MISC box 10) have special rules. Fix: separate “attorney fees” vs “gross proceeds” and report correctly. IRS
Letting W-9s slide. Missing/incorrect TINs trigger B-Notices and 24% backup withholding obligations. Fix: enforce the policy and use TIN Matching. IRS+1
Filing late because “we’re small.” The penalty table applies to everyone. Fix: calendar Jan 31 and use IRIS. IRS+1
Not reporting backup withholding. You must report/submit it on Form 945 and on the related 1099, even under $600. Fix: flag these accounts in your books. IRS+1
Quick reference: what goes where?
1099-NEC, Box 1: Services by nonemployees $600+ (incl. parts/materials); attorney fees. IRS
1099-MISC: Rents, prizes/awards, medical/health care, gross proceeds to attorneys (box 10), and more per the instructions. IRS
No 1099-NEC/MISC for card/app payments (1099-K covers those). IRS
Directors’ fees: 1099-NEC. IRS
Your “January ready” checklist
Vendor master has W-9 on file for each 1099-type payee (e-W9 acceptable). IRS
TIN-matched the vendor file within the last quarter. IRS
Each payee tagged NEC/MISC/K/None. IRS
Backup withholding started for any missing/incorrect TINs; Form 945 procedures set. IRS
IRIS account set and test file created; 10+ returns means e-file required. IRS
Calendar holds for Jan 31 (NEC), Feb 28/Mar 31 (MISC to IRS). IRS
Resource links (bookmark these)
Instructions: 1099-NEC & 1099-MISC (Apr 2025) – What to file, boxes, due dates, attorney rules, and the card/app (1099-K) exclusion. IRS+1
General Instructions for Certain Information Returns (2025) – E-file 10+ rule, IRIS, Form 1096, backup withholding reporting, and 1099-K $2,500 (2025) notes. IRS
IRIS e-file portal – Free IRS system to file 1099s electronically. IRS
Information return penalties (2025 amounts) – The current penalty table. IRS
W-9 (requester instructions) – 24% backup withholding, electronic/substitute W-9 rules, TIN Matching overview, Form 945. IRS
TIN Matching program – Pre-file TIN/name checks (interactive/bulk). IRS
Publication 1281 – B-Notice templates and exact start/stop timing for backup withholding. IRS
Understanding Form 1099-K – What processors report; 2025 threshold context. IRS
Combined Federal/State Filing – Whether your state gets data via IRS. IRS
Put it into practice
You don’t need a bigger accounting system—you need discipline and a checklist. Make W-9s your gate, TIN Match your filter, IRIS your filing lane, and backup withholding your safety net. Do that, and January becomes routine, penalties shrink to zero, and your contractors stay happy because you pay them on time—with clean paperwork.
Want us to set this up with you? Book a Black Mammoth Power Hour and we’ll build your W-9/1099 SOP, run a TIN-match sweep, and get your IRIS filings ready for January—in one working session.