Businesses and other types of organizations now commonly rely on independent contractors to stay flexible, competitive and cost-effective. But in the day-to-day hustle and bustle of working with these providers, it’s easy for reporting and withholding requirements to slip through the cracks. Even small oversights on either obligation can lead to IRS notices, penalties and administrative headaches. Here’s a brief refresher on handling nonemployee compensation.

Reporting requirement

Generally, businesses or other organizations aren’t responsible for withholding federal employment taxes from nonemployee compensation — though certain payments may be subject to income tax withholding, as we’ll discuss below. That said, if you paid $600 or more to an independent contractor in 2025, you must report that compensation to the IRS.

Important: For payments made after December 31, 2025, the threshold has increased to $2,000 under the One Big Beautiful Bill Act (OBBBA). It will be annually adjusted for inflation.

Independent contractor payments are reported on Form 1099-NEC, “Nonemployee Compensation.” You must file the form by January 31 of the year following the payment in question (or the next business day if it falls on a weekend). Note that this is a hard deadline. Unlike other information returns, Form 1099-NEC isn’t subject to an automatic 30-day filing extension. An extension may be available under certain hardship conditions, but it must be requested before the filing deadline using Form 8809, “Application for Extension of Time to File Information Returns.”

Withholding obligation

Independent contractor compensation that must be reported on Form 1099-NEC may be subject to backup withholding, which helps ensure the IRS receives tax due on certain nonwage income. Examples of these situations include when 1) a payee (the contractor) hasn’t provided you with a Taxpayer Identification Number (TIN), or 2) the payee provided a TIN, but the IRS notifies you that it doesn’t match the payee’s name.

A payee’s TIN is either a Social Security Number, an Employer Identification Number, an Individual TIN or an Adoption TIN. When backup withholding is required, a flat 24% rate applies. (This percentage was made permanent under the OBBBA.)

Backup withholding is reported on Form 945, “Annual Return of Withheld Federal Income Tax.” It generally must continue until you receive proper certification from the IRS or corrected information from the payee. In limited cases, contractors may also be able to stop backup withholding by showing that it will cause them undue hardship. If the IRS determines that backup withholding should stop, the payee will receive a written certification to that effect.

Essential part

If you engage independent contractors, reporting their compensation correctly — and properly applying backup withholding when so required — is an essential part of your tax compliance responsibilities. With a strict filing deadline for Form 1099-NEC, and very limited availability of an extension, preparation and accurate recordkeeping are key. 

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