The 1099-NEC Threshold Just Jumped to $2,000. Collect the W-9 Before the First Payment Anyway

The Form 1099-NEC reporting threshold is now $2,000, not $600. The IRS instructions for Forms 1099-MISC and 1099-NEC state that "for tax years beginning after 2025, the minimum threshold amount for reporting certain payments...increased to $2,000". That sounds like less paperwork, and for the designer you paid $900 once, it is. It changes nothing else. You still collect a Form W-9 before the first payment, you can still deduct payments under the threshold, and the question of whether that person is a contractor at all is untouched. Here is the order of operations, and the arithmetic on the one mistake that actually costs money.

What changed, and the four things that did not

Changed: whether you must send a 1099-NEC. Under $2,000 of nonemployee compensation to a US person in the calendar year, no form is required.

Not changed:

• The W-9. The IRS's page on forms for independent contractors says to use Form W-9 to "request the correct name and taxpayer identification number (TIN)...of the payee", and to retain it for four years. You do not know in January whether a contractor will cross $2,000 by December.
• Deductibility. A business expense is deductible because it is ordinary and necessary, not because a form was issued. Small payments still belong in your books with a receipt or invoice.
• Backup withholding. Same page: "You must withhold 24% (backup withholding rate) from reportable payments of nonemployee compensation to U.S. persons" in the circumstances that trigger it, principally a missing or incorrect TIN.
• Classification. The threshold is a reporting rule. Whether the person is an employee is decided by an entirely separate test, covered below.

The arithmetic on a missing W-9

Our worked example. You hire a developer for a $5,000 project, they invoice, you pay the full $5,000, and you never collected a W-9. If backup withholding applied, you were supposed to remit 24% of that payment, $1,200, to the IRS and pay the contractor $3,800.

You paid $5,000. The $1,200 does not come back from the contractor, who has no contractual reason to return it and may be unreachable by the time you find out. Your effective cost for that project is $6,200, a 24% overrun, for a form that takes two minutes to request. Multiply by the number of contractors you engaged without one.

That is the whole case for the rule below. Never send the first payment before the W-9 is in your folder. Not the second payment. The first.

The order of operations

1. Before you agree the work: settle scope and payment terms in writing. If you are unsure whether to quote hourly or fixed, our two-question matrix applies just as well from the buyer's side.
2. Before the first payment, US contractor: collect Form W-9. Check the name and TIN match, and file it. Retain four years.
3. Before the first payment, non-US contractor: collect Form W-8BEN instead. The IRS describes it as the form a foreign person gives "to the withholding agent or payer" when they are "the beneficial owner of an amount subject to withholding". Note the exposure: payments to foreign contractors may face "30% withholding (nonresident alien withholding rate) unless a lower rate is provided by tax treaty". Whether US-source withholding applies to your particular payment depends on where the services were performed, and it is worth twenty minutes with an accountant the first time rather than a guess every time.
4. Through the year: track cumulative payments per contractor. The threshold is annual, so four $600 invoices to the same person is $2,400 and reportable.
5. By 31 January: file 1099-NEC and furnish the payee statement. The instructions are unambiguous that both deadlines are the same date: "File Form 1099-NEC on or before January 31" and "furnish the payee statements and file with the IRS by January 31". Note that 1099-NEC has no extended paper-versus-electronic deadline the way some other returns do.
6. If you will file ten or more information returns in the year: e-filing is mandatory. The IRS states that "Forms 1099-NEC are required to be e-filed by filers of 10 or more information returns in a calendar year", and that count aggregates across return types, not per form.

If you receive money through payment apps and marketplaces as well as paying it out, do not confuse this with the other threshold in the news. The 1099-K rules we covered in the return to $20,000 and 200 transactions govern what gets reported about money coming in. The 1099-NEC governs money going out to people who work for you. Different forms, different directions, different numbers.

The classification test, which is the expensive one

The reporting threshold is a filing convenience. Misclassification is a liability. The IRS frames the common law test in three categories, and it is worth reading them as questions about your own behaviour rather than about the worker:

• Behavioral control: "Does the company control or have the right to control what the worker does and how the worker does his or her job?" Setting working hours, requiring attendance at your standups, and dictating method rather than outcome all point one way.
• Financial control: how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies. Shipping someone a company laptop and reimbursing their software subscriptions is a fact, and facts accumulate.
• Type of relationship: written contracts, whether you provide benefits, how permanent the arrangement is, and whether the work "is a key aspect of the business". A contractor who has done nothing but your work, full time, for two years is the classic problem case.

No single answer decides it, and the IRS is explicit that the whole relationship is weighed. If you genuinely cannot tell, Form SS-8, "Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding", asks the IRS to rule, and the agency's own stated processing time is "at least six months". Plan around that timeline rather than waiting on it. If you have already been treating someone as a contractor and conclude you were wrong, the Voluntary Classification Settlement Program, applied for on Form 8952, reclassifies workers as employees for future periods with partial relief from federal employment taxes.

Two limits on everything above. It is federal only: several states apply their own, stricter classification tests, and satisfying the IRS does not satisfy them, so check the rules where the work is performed. And relief provisions exist where you had a "reasonable basis for not treating a worker as an employee" and filed consistent information returns, which is one more reason to file the forms even when the amounts are small.

The threshold change is real and it will save you a handful of January filings. It is not permission to skip the folder. Collect the W-9, keep a running total per person, and diarise 31 January. The paperwork that protects you costs nothing; the paperwork you skipped costs 24%.