LLC Tier Members: This article covers the foundational knowledge you need about working with contractors, including classification rules, tax forms, filing requirements, and how to pay contractors and issue 1099s outside of Collective Payroll. All of this applies to you. For information on how to pay contractors through Collective Payroll, see "How to Pay and Manage Contractors in Collective" (S Corp tier only).
Overview
Before you begin working with contractors, it's important to understand how worker classification works. Whether someone is considered an employee or an independent contractor is generally determined by your state's employment laws, and the rules can vary by state.
Collective cannot determine or advise on worker classification for you. Misclassifying a worker can have tax and compliance implications, so be sure to confirm how your state defines and treats contractor versus employee relationships before proceeding. You can learn more about classification here. We recommend consulting your legal or tax advisor to help you determine what is right for your circumstances.
Worker Classification
Worker classification varies by state and depends on factors such as:
- Behavioral control (how work is directed)
- Financial control (who controls payment, tools, schedule)
- Independence of the worker's business
Collective cannot classify workers for you. We recommend reviewing:
- General IRS guidance on employees vs. contractors
- State-specific labor rules
What tax forms do I need when hiring contractors?
Form W-9
Requested before work begins. It provides the contractor's:
- Legal name
- Address
- SSN or EIN
The contractor is responsible for filling out a Form W-9 and providing it to you. This information is used to generate any necessary Form 1099-NECs.
Form 1099-NEC
Reports nonemployee compensation once your total payments to a contractor reach the reporting threshold for the year. This threshold is reviewed periodically and may be adjusted for inflation, so confirm the current figure on IRS.gov before you file. The payor is responsible for issuing any necessary 1099-NECs to contractors and filing with the IRS annually by January 31st for the prior year. For example, 2026 Form 1099-NECs are due to be filed with the IRS and disbursed to contractors by Jan. 31, 2027.
Collective issues 1099-NEC forms for contractors who are onboarded and whose payments, both through Collective and externally, are recorded in the Dashboard.
What this means for you: Filing responsibility stays with you as the payer, regardless of the threshold. Keep full records of every contractor payment, include all amounts in your bookkeeping, and hold on to each contractor's W-9. The IRS can review payments of any size, not just the ones that meet the filing threshold.
Who needs a 1099-NEC
Anyone who meets all of the following requirements:
- They were hired as an independent contractor. You generally don't need to issue a 1099-NEC to a corporation or an S Corp for ordinary services, unless the payment is for legal services or certain medical or health care services. Those exceptions apply even when the recipient is incorporated.
- They provided services to your business.
- They were not employees of your business.
- You paid them the reporting threshold or more in the aggregate for the year, including commissions and/or referral fees paid. This threshold is reviewed periodically and may be adjusted for inflation, so confirm the current figure on IRS.gov.
Do I need to issue a 1099-NEC to a nonprofit organization?
Whether a nonprofit you paid for services needs a 1099-NEC depends on how it's structured, not on its nonprofit status alone.
If the nonprofit is incorporated: Payments for ordinary services generally fall under the same corporate exception described above. In most cases, you won't need to issue a 1099-NEC, unless the payment is for legal services or certain medical or health care services, which generally still require one regardless of incorporation.
If the nonprofit is not incorporated, for example an unincorporated association, a partnership-like entity, or a trust, and you paid it for services in your business's trade at or above the reporting threshold, a 1099-NEC is generally required. The reporting rules apply to payments to non-employees, including individuals, partnerships, estates, and, in the exceptions above, certain corporations.
Paying a nonprofit law firm or attorney: Payments for legal services generally require a 1099-NEC even when the law firm or attorney is incorporated. The corporate exception does not extend to legal services.
If you're unsure how a specific nonprofit is structured, request a Form W-9 from the organization. It will show the entity type and help you determine whether a 1099-NEC applies.
Who doesn't need a 1099-NEC
Contractors paid via credit card or third-party payment processor: If you paid your contractors using a credit card, debit card, or through a third-party payment processor like PayPal or Stripe, you generally won't need to create a 1099-NEC. Many payment processors issue a 1099-K, but check with your contractor.
Contractors paid through Fiverr or Upwork: Many freelance marketplaces issue the 1099s for you. Check with your specific vendor to confirm your contractors' forms are taken care of.
Keep your own records regardless of who issues the form. Even when a processor or marketplace handles the 1099, maintain your own records of the payment date, amount, and method. The IRS can still review payments of any size, and your own documentation is what supports you if a payment is ever questioned.
Do third-party platforms issue 1099s for me?
Some platforms are "Third-Party Settlement Organizations" (TPSOs). Many issue 1099s themselves, but not all.
TPSOs that do issue 1099s:
- PayPal
- Upwork
- Fiverr
TPSOs that do not issue 1099s:
- Venmo
- Zelle
- Veem
- Wise
If the platform does not issue 1099s, you must make sure those payments are recorded in Collective Payroll.
Paying Contractors Outside of Collective Payroll
If you are on the LLC tier, you can work with contractors and pay them however you prefer (Zelle, PayPal, Venmo, check, etc.). We recommend sending all contractor payments from your business checking account to keep your bookkeeping clean and your documentation clear.
If you pay a contractor at or above the reporting threshold, you may be required to file Form 1099-NEC.
Filing 1099-NECs without Collective
If you didn't use Gusto or Collective Payroll to pay your contractors, you'll need to generate 1099-NECs for these contractors.
Here are the steps to follow:
- Collect a W-9 from your contractor. This will tell you the legal name, address, and taxpayer identification number (TIN) or Social Security number (SSN) of the contractor. You'll need this to file the 1099-NEC.
- Calculate the total amount you paid the contractor in the previous tax year. This total should only include payments directly to the contractor. Any payments made using a credit or debit card or via a third-party payment processor will be covered by a 1099-K issued by the payment processor.
- Use an online filing service to generate the 1099-NECs. Sites like tax1099.com and 1099online.com are easy to use and e-file your 1099-NECs for a fee.
- Be sure to file and send your contractors their 1099-NECs by the January 31 deadline. The obligation to issue a 1099-NEC lies with US Persons without regard to their location, and not foreign contractors overseas.
Can I pay international contractors?
Collective Payroll currently supports only U.S.-based contractors. For international contractors, you must use an external platform such as:
- Wise
- PayPal
- Veem
Make sure you understand any additional tax, legal, or treaty requirements when hiring internationally.
The information contained in this article is provided for informational purposes only and should not be construed as legal, financial, or tax advice. It is not intended to be a substitute for obtaining legal, accounting, or other financial advice from an appropriate and/or licensed adviser, or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.