Yes. Paying a contractor through PayPal does not remove your obligation to send a 1099. If you paid a non-corporate contractor $2,000 or more for services during 2026, you owe them a Form 1099-NEC, and it doesn’t matter whether the money moved by PayPal, Venmo, check, or cash. PayPal may separately issue the contractor its own Form 1099-K, but that’s PayPal’s report about the contractor’s platform receipts. It is not a substitute for yours.
The $2,000 Threshold and What Triggers a Filing
The One Big Beautiful Bill Act, signed in July 2025, raised the 1099-NEC reporting threshold from $600 to $2,000 for payments made after December 31, 2025.1Internal Revenue Service. Form 1099 NEC and Independent Contractors The change amended 26 U.S.C. ยง 6041 by substituting “$2,000” for “$600.”2Office of the Law Revision Counsel. 26 USC 6041 Information at Source Starting in 2027, the amount will adjust annually for inflation.3Internal Revenue Service. Publication 15 (2026) (Circular E) Employers Tax Guide
Only the dollar amount changed. The four conditions that trigger a 1099-NEC are the same as they’ve always been. You file when all of these are true:4Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC
- The payee is not your employee.
- The payment was for services in the course of your trade or business.
- The recipient is an individual, partnership, estate, or, in limited cases, a corporation.
- Your total payments to that recipient reached $2,000 or more during the year.
If you paid a single contractor $1,500 in 2026, you don’t need to file. That same payment in 2025 would have crossed the old $600 threshold. Either way, the contractor still owes income tax on the money; the threshold only decides whether you have a filing duty.
Why PayPal’s 1099-K Doesn’t Replace Your 1099-NEC
This is where most of the confusion sits. PayPal is a third-party settlement organization under federal tax law, and it has its own separate reporting duty: issuing Form 1099-K to payees who cross the platform threshold.5Office of the Law Revision Counsel. 26 USC 6050W Returns Relating to Payments Made in Settlement of Payment Card and Third Party Network Transactions The same July 2025 law that raised the 1099-NEC threshold reverted the 1099-K threshold to its original level: PayPal issues a 1099-K only when a payee receives more than $20,000 in gross payments across more than 200 transactions in the year.6Internal Revenue Service. IRS Issues FAQs on Form 1099-K Threshold Under the One Big Beautiful Bill
The two forms serve different purposes. PayPal’s 1099-K goes to the contractor and reports everything they received through the platform. Your 1099-NEC goes to the contractor and to the IRS and reports what you specifically paid for services. Even if the contractor gets a 1099-K covering the same dollars you paid, you still owe your own 1099-NEC.1Internal Revenue Service. Form 1099 NEC and Independent Contractors
Friends and Family vs. Goods and Services
PayPal only tracks “Goods and Services” payments toward the 1099-K threshold. Payments sent via “Friends and Family” are treated as personal transfers and don’t count. Some businesses use “Friends and Family” to avoid the transaction fee, which leaves no third-party paper trail behind the deduction. Your 1099-NEC obligation is the same either way. If you paid a contractor $2,000 or more for services, you file.
Who’s Exempt: Corporations, With One Exception
The recipient’s legal structure matters more than the payment method. You file a 1099-NEC for payments of $2,000 or more to individuals, partnerships, single-member LLCs, LLCs taxed as partnerships, and estates.4Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC
You generally don’t file for payments to C corporations, S corporations, or LLCs that have elected corporate treatment.4Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC The contractor’s W-9 tells you which classification applies.
One exception catches businesses off guard: legal fees. If you paid an attorney or law firm $2,000 or more for services, you file a 1099-NEC even if the firm is a corporation. The IRS carves out legal services because attorney fees are a known area of underreporting.
One other boundary: rent, royalties, and prizes go on Form 1099-MISC, not 1099-NEC. For services from a contractor, the 1099-NEC is your form.
Get the W-9 Before You Pay
Collect a completed Form W-9 from every contractor before the first payment goes out. The W-9 gives you the contractor’s legal name, address, taxpayer identification number, and entity type, which is everything you’ll need in January to complete the 1099-NEC.7Internal Revenue Service. Form W-9
If a contractor refuses to provide a W-9 or gives you an incorrect taxpayer identification number, you’re required to withhold 24% of every payment under the backup withholding rules of Section 3406.8Internal Revenue Service. Instructions for the Requester of Form W-9 This is not discretionary. The IRS holds the payer responsible when the normal reporting chain breaks.
How and When to File
The deadline is January 31 of the year after payment. For 2026 payments, you furnish Copy B to the contractor and file Copy A with the IRS by January 31, 2027.4Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC There is no extension for 1099-NEC.
If you’re filing 10 or more information returns of any type during the year, counting all your 1099s and W-2s together, you must file electronically.9Internal Revenue Service. Topic No. 801 Who Must File Information Returns Electronically The IRS offers a free portal called IRIS (Information Returns Intake System) that accepts manual entry or CSV upload and lets you download payee copies.10Internal Revenue Service. E-File Information Returns With IRIS
Under 10 returns total, you can file on paper, but only using the official scannable red-ink Copy A. A regular black-and-white printout won’t work; the IRS processing equipment requires the specific form, which you order from the IRS or buy from authorized vendors.9Internal Revenue Service. Topic No. 801 Who Must File Information Returns Electronically
Penalties for Skipping It
The IRS charges separate penalties for failing to file with the IRS and for failing to furnish the payee copy, so a single missed 1099-NEC can trigger both. The 2026 amounts scale by how late you are:11Internal Revenue Service. Information Return Penalties
- Up to 30 days late: $60 per return.
- 31 days late through August 1: $130 per return.
- After August 1 or never filed: $340 per return.
- Intentional disregard: $680 per return with no maximum cap.
The numbers add up. Five 1099-NECs filed after August 1 is $3,400 in penalties before you account for the matching penalty on the payee copies. Small businesses with average annual gross receipts of $5 million or less get reduced annual caps on the first three tiers, but intentional disregard has no ceiling.11Internal Revenue Service. Information Return Penalties
If You Paid a Foreign Contractor Through PayPal
The 1099-NEC framework doesn’t apply to non-U.S. persons. Instead of a W-9, you collect Form W-8BEN, which documents foreign status and any tax treaty benefits.12Internal Revenue Service. Instructions for Form W-8BEN Payments for services performed in the United States are reported on Form 1042-S, not 1099-NEC.13Internal Revenue Service. Instructions for Form 1042-S (2026) If the work was performed entirely outside the United States, the income is generally foreign-source and not reportable on Form 1042-S. The default withholding rate for foreign contractors is 30%, though a treaty may reduce or eliminate it. PayPal doesn’t change any of this. What matters is the contractor’s tax residency and where the work was done.