Key Takeaways:
- 1099 reporting is critical for professional services firms working with contractors, vendors, and subcontractors.
- Misclassifying workers or failing to collect required documentation can trigger penalties and compliance issues.
- Modern e-filing technology makes 1099 compliance easier, but you still need the right processes in place.
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As a professional services firm, you likely rely not only on your employees but on a wide network of contractors, vendors, and subcontractors. When tax season rolls around, that web of relationships can quickly turn into a compliance headache if your 1099 filings aren’t handled correctly.
Whether you’re a marketing agency paying freelance designers, an architecture firm managing subcontractors, or a consulting company working with specialists, issuing accurate 1099s is nonnegotiable. Getting it wrong can trigger penalties, delays, or even IRS scrutiny. Here’s what you need to know to protect your business.
What Exactly Is a 1099?
At its core, a 1099 is the IRS’s way of making sure income is properly tracked and reported when payments are made to non-employees. Unlike a W-2, which documents wages and tax withholdings for employees, a 1099 documents payments made to independent contractors or vendors.
Some of the most common forms of 1099s include:
- 1099-NEC: For non-employee compensation, such as payments to freelancers or consultants
- 1099-MISC: For rent, royalties, and other miscellaneous payments
- 1099-INT and 1099-DIV: For interest and dividend payments
- 1099-K: For third-party payment processing (e.g., PayPal or Square transactions)
For most professional services firms, the 1099-NEC is the form that matters most. If you pay a service contractor at least $600 during calendar year 2025 ($2,000 for payments made during the 2026 calendar year and later), and they are not a corporation*, you likely need to issue one. It sounds simple, but the reality of tracking, categorizing, and reporting payments correctly is more complex.
*one major exception is if it is a C corporation that provides legal services
The Compliance Challenges You Face
Filing 1099s seems straightforward, but the details can get complicated quickly. Many firms discover gaps only after the deadline has passed. Consider these common problem areas:
- Collecting vendor documentation: Are you requesting a W-9 from every contractor or vendor you pay? Without it, you may not have the tax ID information needed to file properly.
- Knowing which payments count: Not all payments, or contractor entity types require a 1099. Distinguishing which ones do — and which don’t — takes a careful review of your accounts.
- Worker classification: Do you know if the people you’re paying really qualify as independent contractors? If you set their hours, control their work, or they rely on you as their sole source of income, the IRS may see them as employees.
- Subcontractor oversight: If you’re a general contractor or project manager, are you sure your subs are being reported correctly? Payments buried in project budgets may still require a 1099, not to mention appropriately bifurcating materials from services.
Many busy firm owners don’t know the right questions to ask, let alone how to apply the IRS’s rules consistently. That uncertainty is exactly what puts your business at risk.
The Risks of Getting It Wrong
Mistakes in 1099 reporting aren’t just minor slip-ups — they can be costly. At both the federal and state levels, penalties stack up quickly for:
- Late or missing filings: Each form carries a per-form penalty that grows the longer you delay. Some 1099s are due at the end of January, while others aren’t due until the end of the first quarter — potentially providing a narrow window to compile and organize the necessary information, or leaving the door open for costly mix-ups.
- Misclassification of workers: Treating an employee as a contractor may save money upfront, but it leaves you exposed to payroll tax liabilities, audits, and legal action.
- Improper delivery: Sending 1099s by email without following IRS consent rules can leave you noncompliant, even if every number on the form is correct.
The IRS has become increasingly aggressive in pursuing these errors because 1099s directly impact tax collections. For firms already balancing client demands, project deadlines, and staff needs, the last thing you want is a costly penalty or drawn-out audit.
Why Technology Has Changed the Game
Not long ago, filing 1099s was a tedious, paper-heavy process. Each set of forms required a 1096 summary sheet, and correcting a single error meant reissuing everything. Mailing forms added another layer of hassle and expense.
Today, modern e-filing systems have transformed compliance. You can file forms electronically, track submissions and even IRS acceptance in real time, and even have forms automatically mailed to recipients. Corrections are simpler, and the process is far more cost-effective than in the past.
Still, technology isn’t a substitute for good processes. If you don’t have W-9s on file, if your contractors are misclassified, or if you’re tracking payments by project instead of by vendor, e-filing won’t protect you from errors. The system is only as good as the information you put into it.
Unique Challenges for Professional Services Firms
If you’re in marketing, architecture, engineering, consulting, or another project-based industry, your 1099 reporting challenges often go beyond the basics. Some examples include:
- Expenses versus capitalized costs: Large project costs may need to be capitalized on your balance sheet, but payments to contractors still may require 1099s. Are you tracking both correctly?
- Materials versus labor: Are you breaking out payments properly, or lumping everything together in ways that make IRS matching difficult?
- Vendor versus project segregation: The IRS requires reporting by vendor, not by project. If your accounting system only tracks payments at the project level, you may be missing required filings.
- Entity aggregation: If you operate multiple entities that roll up into a consolidated return, remember that 1099 thresholds apply in the aggregate, not just at the individual-entity level. For example, if you own three offices and each pays the same contractor $200, those payments must be combined and reported as $600 on a single 1099. It’s a simple requirement that’s easy to miss if your accounting is segmented by entity. (Note: this example applies to tax year 2025 since the One Big Beautiful Bill Act increased the 1099 reporting threshold from $600 to $2,000 starting in 2026, with adjustment for inflation in 2027.)
These aren’t just accounting technicalities — they’re areas where the IRS expects precision. The IRS is already known to use automation to match documents, and the current explosion of AI is certain to ramp this up even more. If you aren’t confident you’re handling them correctly, that’s a sign it may be time to get outside support.
Checklist: How You Can Get Ahead Now
The best time to address 1099 compliance is before year-end, not in the rush of January. Use this checklist to spot gaps now:
- Do you have complete W-9s for all vendors and contractors?
- Do you know how your vendors are set up for tax compliance?
- Have you reviewed payments to determine which require a 1099?
- Are your contractors properly classified under IRS standards?
- Do you have a reliable system for delivery that meets federal requirements?
- Are you confident payments to subcontractors are being captured correctly?
- Are you keeping your W-9s on file for at least four years (as the IRS may request them)?
If you can’t answer “yes” to all of these, don’t wait until the deadline looms. Proactive review now will save you stress — and potentially money — later.
How MGO Can Help
Our Professional Services practice provides full-service 1099 support — from reviewing vendor payments and documentation to preparing and e-filing forms on your behalf. Whether you want hands-on guidance or a fully outsourced solution, our team has the experience and tools to protect your firm from costly mistakes.
Contact us today to simplify your 1099 compliance and stay focused on growing your business.