What it means
Employees receive a W-2 form showing wages and the tax already withheld. Everyone else who is paid by a business gets some version of a 1099, which shows the gross amount paid with no tax withheld.
The recipient is responsible for calculating and paying their own income tax and, for self-employed people, self-employment tax that covers Social Security and Medicare contributions. There are more than a dozen variants.
The ones most people encounter are the 1099-NEC (non-employee compensation, used for freelancers and independent contractors paid $600 or more in a year), the 1099-MISC (rent, prizes, royalties and other miscellaneous income), the 1099-INT (bank interest), the 1099-DIV (dividends), the 1099-B (proceeds from selling investments) and the 1099-K (payments processed through card networks and platforms such as PayPal or Stripe). Each has its own threshold and rules, and the thresholds change from time to time, so it is worth checking the current year's IRS guidance.
For a business, the process runs in two directions. Before paying a new contractor, collect a Form W-9 from them, which gives their legal name, address and taxpayer identification number.
After the year ends, issue the 1099 to each qualifying recipient by the end of January and file copies with the IRS. Payments to corporations are generally exempt from 1099-NEC reporting, but payments to individuals, sole traders, partnerships and most LLCs are not, and payments to lawyers must be reported regardless of entity type.
Because a 1099 is sent to the IRS as well as to the recipient, the IRS can match the amounts against what the recipient declares. Income that appears on a 1099 but not on a tax return is one of the most common triggers for an IRS notice.
In practice
Real-world examples.
Example
A marketing agency pays a freelance copywriter $18,500 during the year and issues a 1099-NEC in January.
Example
A landlord who receives $24,000 of rent from a company tenant is sent a 1099-MISC by that company.
Example
An investor with a brokerage account receives a 1099-DIV for dividends, a 1099-INT for cash interest and a 1099-B listing every sale of shares during the year.
Think of it
“1099 reports non-wage income-interest, dividends, freelance income.
Formula
Calculation
There is no formula for the form itself, but a contractor's tax position on 1099 income can be estimated.
Worked example. A freelance designer receives 1099-NEC forms totalling $72,000 for the year and has $12,000 of deductible business expenses.
- Net self-employment income = $72,000 minus $12,000 = $60,000
- Self-employment tax base = $60,000 x 92.35% = $55,410
- Self-employment tax at 15.3% = $8,478 (this covers Social Security and Medicare, which an employer would normally split with an employee)
- Half of the self-employment tax ($4,239) is deductible when working out income tax
- Taxable income before other deductions = $60,000 minus $4,239 = $55,761, on which ordinary federal income tax is then calculated at the designer's marginal rates
Because no tax was withheld during the year, the designer should have paid estimated taxes quarterly. Setting aside roughly 25% to 30% of each 1099 payment is a common rule of thumb for freelancers in moderate tax brackets.Case study
Seen in the real world.
A growing events company used around 40 freelance technicians and never issued 1099s, assuming that because the freelancers invoiced through their own business names the obligation did not apply. During a routine review, the company's new accountant found that most of the freelancers were sole proprietors, that several had been paid more than $20,000 in a year, and that no W-9s had ever been collected. The exposure included penalties per unfiled form plus, more seriously, potential backup withholding liability for payments made without a valid taxpayer identification number.
The company spent two months collecting W-9s, filed the late forms and paid reduced penalties under a voluntary disclosure. It then built 1099 collection into its onboarding: no W-9, no first payment. The following January, its 1099s went out in a single afternoon.
Watch out
Common mistakes.
- Assuming a contractor's business name means they are a corporation. Many businesses are sole proprietorships or LLCs taxed as individuals, and they need a 1099. The W-9 tells you.
- Forgetting that 1099 income arrives with no tax withheld. Freelancers who spend the full amount often face a large bill and penalties the following April.
- Deducting nothing. Contractors can usually deduct home office costs, equipment, software, mileage and professional fees against 1099 income.
Questions
People also ask.
Which 1099 do I use for a freelancer?
The 1099-NEC for payments of $600 or more in a year to a non-employee for services.
What if I paid a contractor by card or through a platform?
Payments settled by card networks and third-party platforms are generally reported by the platform on a 1099-K rather than by you, so you may not need to issue a 1099-NEC for those amounts. Check the current IRS rules.
What happens if I do not file 1099s?
Penalties apply per form and rise the later they are filed, and intentional disregard carries much higher penalties.
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