A general contractor with forty subs has forty chances a year to get a penalty notice. Most of them come from the same handful of mistakes: no W-9 on file, a wrong taxpayer identification number, a late filing, or a sub who was paid in cash and never got a form at all.
None of that is exciting. All of it is expensive. And in construction, the 1099 does a second job: it is your best evidence that you treated a worker as a contractor in good faith. Lose the paperwork and you lose part of your defense in a classification fight.
Who gets a 1099-NEC, and the new $2,000 threshold
Payments of compensation for services to nonemployees in the course of your trade or business are reported under IRC 6041 and 6041A, on Form 1099-NEC. For years, the threshold was $600.
That changed. Notice 2025-62 explains that section 70433 of Public Law 119-21 raised the section 6041(a) reporting threshold from $600 to $2,000 for payments made after December 31, 2025, and before January 1, 2027, with inflation adjustment for payments after December 31, 2026. Section 6041A now follows the section 6041(a) amount. The 2026 Form 1099-NEC instructions say to enter nonemployee compensation of $2,000 or more.
So for payments made in 2026, a sub you paid $2,000 or more gets a 1099-NEC. For 2025 payments, the old $600 threshold applied.
Do not read too much into the higher threshold. Your sub still owes tax on every dollar. And if the IRS later decides a sub was an employee, the question under IRC 3509 is whether you met the reporting requirements, which is easier to prove when you filed forms even near the line. See our guide to subcontractor misclassification.
Corporations and the medical exception
Payments to corporations are generally exempt from 1099 reporting under Treas. Reg. 1.6041-3(p)(1). The exceptions in that regulation include attorneys' fees and payments to corporations providing medical and health care services. For contractors, the practical rule is simpler: get a W-9 from everyone, and let the W-9 tell you whether a form is required.
The January 31 deadline
Under IRC 6071(c), returns and statements reporting nonemployee compensation must be filed by January 31 of the year after the payments. Unlike most other information returns, there is no later due date for electronic filing of nonemployee compensation. Forms 1099-NEC for 2026 payments are due January 31, 2027.
What penalties look like for 2026 forms
Penalties for failing to file correct information returns are in IRC 6721, and penalties for failing to furnish correct payee statements are in IRC 6722. They apply separately, so one bad 1099 can trigger both. Rev. Proc. 2025-32 sets the amounts for returns and statements required to be filed or furnished in 2027, which covers 2026 Forms 1099-NEC:
| When corrected | Penalty per return (2027 filings) | Annual maximum, gross receipts of $5 million or less |
|---|---|---|
| Within 30 days after the due date | $60 | $244,500 |
| After 30 days but by August 1 | $130 | $698,500 |
| Later, or never | $340 | $1,397,000 |
Businesses with average annual gross receipts of more than $5 million over the most recent three years have higher annual maximums: $698,500, $2,095,500 and $4,191,500 respectively.
Intentional disregard is a different world. For most information returns, the penalty is the greater of $690 per return or 10 percent of the aggregate amount required to be reported correctly, with no annual limit. Paying crews in cash and deliberately skipping the forms is the kind of conduct that invites that characterization.
Reasonable cause
Under IRC 6724(a), the penalties do not apply if the failure was due to reasonable cause and not willful neglect. Notice 2025-62 summarizes the regulation, Treas. Reg. 301.6724-1: the filer generally must show significant mitigating factors or events beyond its control, and must show it acted in a responsible manner both before and after the failure. Asking for a W-9 before paying, and following up when one is missing, is what acting responsibly looks like.
Backup withholding
Backup withholding is the rule that turns a missing or wrong TIN into your problem. Under IRC 3406(a), if a payee fails to furnish a TIN in the required manner, or the IRS notifies you that the TIN is incorrect, you must withhold from reportable payments. The IRS states the current rate as 24 percent.
Payments to nonemployees reported under sections 6041 and 6041A are "other reportable payments" under section 3406(b)(3). Section 3406(b)(6) was amended in 2025 so that these payments are reportable for backup withholding only once the year's payments reach the section 6041(a) threshold, or if you were required to file a return for the payee the prior year, or if you backup withheld from the payee the prior year.
Missing TIN
If the sub never gives you a TIN, section 3406(e)(1) applies backup withholding to reportable payments for as long as the TIN has not been furnished. No W-9, no full payment.
Incorrect TIN: the B-notice process
When the IRS matches your 1099s and finds a name and TIN that do not match, it sends you a CP2100 or CP2100A notice. IRS Publication 1281 (Rev. 12-2023) lays out what you do next:
- Send the first "B" notice, a Form W-9 and an optional reply envelope to the payee within 15 business days of the CP2100 date or the date you received it, whichever is later.
- Begin backup withholding on all reportable payments to the payee no later than 30 business days after you received the CP2100.
- Stop backup withholding within 30 calendar days after you receive the required certification: a signed Form W-9 after a first notice, or TIN validation from the Social Security Administration or the IRS after a second notice within three years.
Section 3406(h)(2) adds a hard rule: if a payee furnishes two incorrect TINs in any 3-year period, after the second notice you treat the payee as not having furnished a new TIN until the IRS notifies you that a correct TIN has been furnished.
If you do not withhold
Publication 1281 is direct about it: if you do not collect backup withholding from affected payees as required, you may become liable for any uncollected amount. Under IRC 3406(h)(10), amounts subject to backup withholding are treated, for collection and procedure purposes, as if they were wages paid by an employer. That is a liability the IRS can assess against your business, and it comes with interest.
Fixing mistakes you already made
The penalty table rewards speed. A wrong 1099 corrected within 30 days of the due date costs a fraction of one left alone, so when a sub calls in February to say the amount or TIN is wrong, fix it that week. If you discover that subs were never sent forms at all for a prior year, file late rather than not at all, and document why the forms were missed. That record is the foundation of any reasonable cause request under IRC 6724(a).
When a penalty notice arrives, read which section it cites. A section 6721 penalty is for the return filed with the IRS; a section 6722 penalty is for the statement you owed the sub. They are separate failures, and the facts that support reasonable cause for one may not support the other.
A system that works on a job site
- No W-9, no check. Make it a written policy and enforce it.
- Run new subs through the IRS TIN Matching program before the first payment if you are eligible to use it.
- Record every payment, including cash draws, in the vendor file.
- Calendar January 31, and file corrected forms within 30 days when you find errors.
- Answer CP2100 notices on the Publication 1281 timeline and keep the file.
The Construction Industry Audit Technique Guide notes that backup withholding can apply to subcontractors, so expect an examiner to ask; see our guide to the construction audit guide. For help with penalty notices already in hand, the firm's small business IRS problems guide explains its approach.
The cheapest piece of paper on a job site is a W-9. The most expensive is the one you never got.