As a California contractor or service business owner, understanding 1099 reporting rules isn’t just good accounting — it’s essential for IRS compliance and avoiding costly penalties. Whether you hire subcontractors, freelancers, or other independent professionals, proper 1099 handling ensures you’re paying the right taxes and keeping your business in good standing.
In this guide, we break down the core 1099 rules for California, what triggers a reporting requirement, how to classify workers, and best practices to stay compliant.
What Is a 1099 and Why It Matters
A Form 1099-NEC (Nonemployee Compensation) reports payments made to non-employees — typically independent contractors, consultants, and freelancers. The IRS and the Franchise Tax Board use this form to ensure contractors accurately report income.
For service businesses that pay outside help, issuing 1099s:
- Helps the IRS track taxable income
- Protects your business from misclassification liabilities
- Keeps your bookkeeping clean and audit-ready
Failing to file required 1099s can result in penalties — whether an honest mistake or intentional omission.
Who Needs to Receive a 1099 in California?
You generally must issue a 1099-NEC to any contractor or non-employee you paid:
- $600 or more in a calendar year
- For services, not goods*
(*Goods only don’t require 1099s — but mixing services and goods can complicate things.)
Examples of workers who may need a 1099:
- Freelance designers, developers, consultants
- Independent subcontractors
- Specialized technicians or trade partners
- Legal, accounting, or marketing professionals
Examples that usually do not require a 1099:
- W-2 employees (handled via payroll)
- Corporations, including most S-Corp and C-Corp entities (with exceptions, see next section)
When You Don’t Need to File a 1099
You usually don’t issue a 1099 for:
Payments to W-2 employees (handled through payroll) Payments to corporations (C-Corp or S-Corp) Most Merchandise purchases where no services are involved
Exceptions: Certain corporate vendors — like attorneys — still require a 1099 even if incorporated.
What Forms to Use
Here are the main forms you’ll work with:
Form W-9 (Request for Taxpayer ID)
Before you pay a contractor, have them complete a W-9 — this gives you their legal name, TIN/EIN, and entity type.
Form 1099-NEC
If you paid $600+ for services, use this form to report those payments.
File to the IRS Provide a copy to the contractor File even if there was no federal tax withheld
California Specific
California uses many of the same 1099 rules as the Federal government, but the Franchise Tax Board may also cross-check returns against California filings — so accuracy matters on both fronts.
Worker Classification: 1099 vs. W-2
One of the most common mistakes business owners make is misclassifying workers.
Independent contractors (1099) typically:
- Control how, when, and where work is done
- Are not on payroll
- Have the ability to work for others
Employees (W-2) typically:
- Are directed in how work is performed
- Use company tools or workspace
- Have set schedules
Misclassification can trigger:
- Back payroll taxes
- Penalties from IRS & California Employment Development Department (EDD)
- Worker benefit liabilities
When in doubt, use the IRS’s 20-factor common law test or consult a CPA/tax attorney.
1099 Deadlines You Must Know
Federal (IRS)
- Send contractor copies by January 31
- File with the IRS by January 31 (electronically or by mail)
California
- Same timeline generally applies, but confirm with your tax advisor and with the EDD if payroll issues are involved.
Missing deadlines can lead to fines — so mark your calendar!
Best Practices for Contractors & California Service Businesses
Here are practical steps to keep your 1099 process clean and compliant:
Collect a W-9 before the first payment Track contractor payments throughout the year Distinguish between payments for services vs. goods Use reliable accounting software (QuickBooks, Xero, etc.) File early and electronically when possible Review worker classification annually
Common Mistakes to Avoid
Waiting until year-end to collect W-9s Issuing 1099s to corporate vendors where not required Misclassifying employees as independent contractors Forgetting to issue 1099s for attorney or legal fees Not reconciling your books before filing
Final Thoughts
For California contractors and service businesses, accurate 1099 reporting protects your company from IRS headaches and costly penalties. It also supports good financial habits and builds trust with your team of independent professionals.
When in doubt, consult a tax professional — especially if worker classification or multi-state rules are involved.