How to Pay 1099 Contractors at a Startup (2026 Guide)

The short answer

To pay a 1099 contractor, collect a signed Form W-9 before you send money, pay the agreed amount without withholding taxes, and file a 1099-NEC if you paid them $2,000 or more for work done in 2026.

The recipient copy and the IRS copy are both due January 31. Because January 31, 2027 falls on a Sunday, the practical deadline for 2026 payments is Monday, February 1, 2027 (Rho's calculation from the IRS weekend rule).

Most startups can do all of this in a spreadsheet and a bank account. Payroll software earns its fee when you have several contractors and want W-9 collection and 1099 filing handled for you.

Key takeaways

• The 1099-NEC threshold rose to $2,000 for payments made in 2026. Payments made in 2025 and earlier still use $600.

• A W-9 comes first, not last. Without a taxpayer ID, you may owe backup withholding at a flat 24%.

• Calling someone a contractor does not make them one. The IRS looks at behavioral control, financial control, and the type of relationship.

• You do not withhold income tax, Social Security, or Medicare from contractor payments. The contractor pays self-employment tax themselves.

• Card and payment-app payments usually do not go on a 1099-NEC. The payment processor reports those on a 1099-K.

• Late filing costs real money. For returns due in 2027, the penalty is $60 to $340 per return, and $690 for intentional disregard.

• Provider pricing varies more than the work does. Published list prices for contractor handling start around $25 a month for a small bench (QuickBooks, 20 contractors included) and reach $49 per contractor per month (Deel), as of November 5, 2026.

At a glance: five steps

1. Classify. Confirm the person is a contractor under the IRS test, not an employee.

2. Collect a W-9. Get their legal name and taxpayer ID before the first payment.

3. Write it down. Scope, rate, payment terms, and who owns the work.

4. Pay without withholding. ACH, check, or a provider, and keep the record.

5. File a 1099-NEC. Send the recipient copy and file with the IRS by January 31 (February 1, 2027 for 2026 payments).

1099 figures that matter, as of November 2026

All figures below were read on irs.gov on November 5, 2026.

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Step 1: 1099 independent contractor vs employee (the IRS test)

The IRS uses a common-law test with three categories of evidence: behavioral control, financial control, and the type of relationship.

Behavioral control asks whether you direct how the work gets done, not just what the result is.

Financial control asks who supplies tools, who bears the risk of loss, and whether the person can work for other clients. Relationship asks about written contracts, benefits, and whether the work is a permanent part of your business.

No single factor decides it, and a contract that says "independent contractor" does not override the facts.

A designer who delivers a brand kit on their own schedule and tools looks like a contractor. Someone who works set hours on your Slack, with your laptop, for a year, looks like an employee.

If the answer is employee, you run payroll instead. Rho's guide to how to run payroll for a startup covers that path, including classification.

Step 2: What is a W-9 and when to collect it from a 1099 contractor

A W-9 is how a contractor gives you their legal name, tax classification, and Taxpayer Identification Number (a Social Security number or an EIN). You are the "requester," and you need it to file the 1099-NEC later.

Ask for it at onboarding, not in January. Chasing a freelancer for a tax form eleven months after they stopped working with you is how startups end up with missing TINs.

What happens if they will not provide one? The IRS says backup withholding applies at a flat 24% when a payee does not give a TIN in the required manner. In practice, you withhold 24% from payments and send it to the IRS.

Two quick rules for the form itself:

• Keep the signed W-9 on file for the life of the relationship and the retention period your accountant recommends.

• Do not send the W-9 to the IRS. It stays in your records.

Does every contractor need one? Not for reporting purposes if you are under the threshold, but collect it anyway. Payments change, and you cannot get a W-9 retroactively with the same ease.

Step 3: Agree on terms in writing

A contractor agreement does not replace the IRS test, but it supports it. Put four things in writing:

• Scope and deliverables. What gets done, not how many hours it takes.

• Rate and payment schedule. Fixed fee, hourly, or milestone, and the due date after an invoice.

• Expenses. Who pays for tools, travel, and software.

• Ownership. Who owns the work product, and any confidentiality terms.

Have the contractor invoice you. An invoice gives you a clean record, a payment reference, and a natural trigger for payment.

Step 4: Pay without withholding

Pay the full invoice amount. Do not withhold income tax, Social Security, or Medicare. The contractor handles their own taxes, which is why they will see you on a 1099 rather than a W-2.

The usual payment methods:

• ACH or direct deposit. Cheap, traceable, and standard for US contractors.

• Check. Slower, but still common, and it leaves a clear paper trail.

• Wire. Fast, and often the right call for large or international payments, with fees that vary by bank.

• A payroll or contractor-payments provider. Handles the payment and the paperwork in one place.

• Card or payment app. Convenient, but it changes how the payment is reported (see below).

According to the IRS, payments made by credit or debit card are not reported on Form 1099-MISC or 1099-NEC. The payment processor reports them on a 1099-K instead.

So when you count what you paid a contractor toward the threshold, leave out card payments. Keep paying by ACH or check if you want one clean number to report.

Whatever method you use, record the date, amount, and invoice number. That record is what you will rely on when you build the 1099 in January.

Step 5: File Form 1099-NEC (and why not 1099-MISC)

Use Form 1099-NEC for nonemployee compensation, which is what you pay contractors for services. The 1099-MISC covers other payment types, such as rents and prizes. Payments made by card or payment app are reported by the processor on a 1099-K, not on your 1099-NEC.

File Form 1099-NEC for each contractor you paid $2,000 or more for services in 2026. Send the recipient copy and file with the IRS by January 31, which for 2026 payments means Monday, February 1, 2027.

A few details that trip people up:

• Corporations are generally exempt. Payments to a corporation, including an LLC taxed as a C or S corporation, generally do not need a 1099-NEC. The W-9 tells you how the payee is classified. Attorneys' fees are an exception.

• Use NEC, not MISC. Nonemployee compensation goes on the 1099-NEC. The 1099-MISC covers other things like rents and prizes.

• State filing may apply. Check your state's rules, since some require their own copy.

What if you miss the deadline? For returns due in 2027, the penalty is $60 per return up to 30 days late, $130 from day 31 through August 1, and $340 after that or if you never file. Intentional disregard is $690 per return.

Can you file 1099s yourself? Yes. The IRS accepts electronic filing, and many startups use their payroll provider or accounting software to do it. Doing it by hand is fine for one or two contractors and gets tedious fast.

Payroll software for 1099 contractors: what Gusto, OnPay, Deel, QuickBooks, and Rippling charge

Payroll software does three contractor jobs: collect the W-9, pay by direct deposit, and e-file the 1099-NEC. Providers differ on price and on how much of that they do.

Pricing last verified: November 5, 2026. Every figure below is the provider's own published list price, read on that date. Promotions are left out.

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Here is what the table does not tell you. OnPay and QuickBooks price per person; Gusto lists contractor payments on all three plans but its pricing read does not state a separate contractor fee, so confirm the contractor rate before buying.

Ten contractors on OnPay cost $49 plus $60, or $109 a month, per OnPay's published $49 base + $6 per worker. Deel prices per contractor, so ten contractors cost $490 a month before extras. Rippling does not publish a contractor price, so you have to ask.

Also worth knowing: several provider pages still show the old $600 threshold. Use the IRS figure, $2,000 for 2026 payments, not a vendor's help page.

For a deeper look at the payroll side, see Rho's comparison of the best payroll software for startups.

Which provider fits

How the providers were compared: each was reviewed on published list price, how much of the contractor workflow it handles (W-9 collection, payment, 1099-NEC filing), international reach, and whether the price scales sensibly as you add contractors. Prices are the providers' own, read on November 5, 2026.

• Startups that also run employee payroll: Gusto, from $49/mo base. Domestic contractors are covered on every plan, and 1099-NEC e-filing carries no extra cost.

• A low flat base with a few 1099 workers: OnPay, $49/mo + $6/worker. It generates and files 1099-NEC automatically and pays by direct deposit, check, or prepaid card.

• Contractor-heavy teams across borders: Deel, from $49 per contractor per month. Contracts, invoicing, and multi-currency payments in one place, with Contractor of Record from $325 per contractor per month if classification risk worries you.

• A small bench of US contractors already in QuickBooks: QuickBooks Contractor Payments, $25/mo list with 20 contractors included. Each additional contractor is $2.

• Worth a quote for payouts in many currencies: Rippling lists 15+ payout options and 50+ currencies, typically 2 to 4 days to reach a contractor's balance. It publishes no contractor price.

• Whatever you pick: collect the W-9 before the first payment, and keep your own payment records even if the software keeps them too.

Scenarios: which setup fits

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Paying international contractors

Paying someone outside the US works differently from paying a domestic freelancer. The tax paperwork is not the W-9.

A foreign contractor generally does not give you a W-9. They typically give you a Form W-8 series form, such as the W-8BEN for individuals.

Whether you owe any US withholding depends on where the work is performed and the tax treaty situation. The IRS 1099-NEC instructions say to use Form 1042-S for payments to nonresident aliens, which is a different return.

Get the right form and ask your accountant before you pay a foreign contractor.

On the payment side, you have three options:

• A payroll or contractor provider with a global product (Gusto's add-on, Deel, Rippling). It handles currency conversion and local payout.

• A bank wire. Simple, but it can pick up fees from intermediary banks.

• A payment app. Convenient, but it can mean a 1099-K and its own fees.

Whichever you choose, compare the total landed cost to the contractor, not just the headline fee. Exchange rate spread is often larger than the transfer fee.

Record keeping

Keep these for each contractor, in one folder or one system:

• The signed W-9 (or W-8 form for foreign contractors)

• The signed agreement and any scope changes

• Every invoice and the payment that settled it

• The 1099-NEC you filed and when you filed it

Pull a payment total per contractor in December. If anyone is near the $2,000 mark, you want to know before January, not after.

Ask your accountant how long to retain the records. The right answer depends on your situation, and they will have a view.

If you pay contractors by ACH from a business account, Rho charges $0 in fees on domestic ACH, though the sender's or recipient's bank may charge its own. See Rho's guide to ACH processing fees.

If you are setting up a business account to pay contractors by ACH, you can open an account on the Rho banking platform.