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You paid $40,000 this year to a designer, a subcontractor, or an external consultant. You never asked them for the W-9 form because "they're trustworthy" and "it can be sorted out in January." January arrives, the contractor doesn't respond, or gives you an identification number that doesn't match IRS records. That's when you discover that, by law, you were supposed to withhold 24% of those payments as backup withholding and you didn't. That withholding doesn't disappear: the IRS can collect it from you, meaning up to $9,600 out of your pocket, plus penalties for each 1099 filed late or with errors.
This mistake is common among business owners, agencies, and independent professionals in Florida who hire freelancers. October is the ideal time to correct it, because you can still do so calmly and not in the last week of January.
When your business pays an individual or a non-corporate LLC for services, you must report those payments to the IRS on Form 1099-NEC if they exceed the annual threshold. To report them, you need the contractor's correct legal name and TIN (tax identification number: Social Security Number, ITIN, or EIN). You obtain this information with the W-9 form.
The mistake has three common variants:
1. The backup withholding you failed to do. If a contractor doesn't provide their TIN, the law requires you to withhold 24% of reportable payments and deposit it with the IRS. If you didn't withhold it, the Internal Revenue Code (section 3403) makes you, as the payer, responsible for that amount.
2. Penalties for late or incorrect 1099 forms. For forms due in 2026, the IRS set these penalties per form:
The penalty applies twice: once for not filing with the IRS and once for not delivering it to the contractor. With 10 contractors and late-filed forms, the bill can exceed $6,000 before adding any withholding.
3. Questioned deductions. In an audit, a professional services expense without a 1099 or provider documentation loses strength as a deduction. The risk is no longer just the penalty but also the taxable base of your business.
The IRS knows where money slips through the cracks. According to its own estimates of the tax gap, income with little or no third-party reporting has a net underreporting rate of nearly 55%. For income with substantial withholding and reporting, such as wages, that rate is just 1%. The projected gross tax gap for fiscal year 2022 was $696 billion.
That's why Form 1099 is one of its favorite tools: it cross-checks what you report as an expense with what the contractor reports as income. When the numbers don't match, the first file to be opened may be yours.
The law known as the One Big Beautiful Bill Act, signed in July 2025, raised the reporting threshold for Forms 1099-NEC and 1099-MISC from $600 to $2,000 for payments made on or after January 1, 2026. After 2026, that amount will be adjusted for inflation.
This helps, but also opens two traps:
The threshold for payments processed through platforms like PayPal or Venmo in commercial mode, which are reported on Form 1099-K, also returned to $20,000 and 200 transactions. Additionally, payments made by credit card or through payment platforms are reported by the processor, not you. This detail prevents duplicate reporting.
It's easy to see the W-9 as paperwork, but in reality, it works like cheap insurance. It costs an email before the first payment and protects you from a liability that can reach 24% of what you paid, plus per-form penalties and deductions at risk. The more contractors your operation has, the more significant that difference becomes.
At La Familia Multiservices, we review your 2026 third-party payments with you and verify your contractors' information. We also prepare and file your 1099 forms on time and analyze whether any of your contractors should be on payroll. Schedule your consultation at www.lafamiliamultiservices.com and close out the year with your information reporting obligations in order.
