Talk to a real human
(682) 279-1397Mon–Fri · 9am–5pm CST
1099 & Contractor Compliance Glossary
Plain-English definitions for the 70+ terms that show up when you're paying 1099 contractors — IRS forms, classification rules, payment rails, and the operational vocabulary in between. Each entry links to deeper guides where they exist.
#
1099 Penalty Schedule
IRS-set per-form penalties for late or incorrect 1099 filings, ranging from $60 (filed within 30 days late) to $660+ per form for intentional disregard.
1099-MISC
IRS form used to report miscellaneous income such as rent, prizes, and attorney gross proceeds — not contractor service payments.
1099-NEC
IRS form used to report nonemployee compensation of $600 or more (rising to $2,000 for tax year 2026) paid to a contractor during the year.
1099-NEC Box 1
The single reporting box on Form 1099-NEC — used for nonemployee compensation paid to a contractor for services.
A
AB 5 (California ABC Test)
California law that uses a strict three-part "ABC" test to classify workers as employees by default, with limited carve-outs for specific industries.
AB-5 Salon Test
California's three-part ABC test for worker classification under AB-5, which makes it especially hard for California salons to legitimately treat stylists or barbers as independent contractors.
Accrual Basis Accounting
An accounting method where income is recognized when earned (regardless of when cash arrives) and expenses when incurred — required for some larger businesses.
ACH
Automated Clearing House — the US electronic bank-to-bank payment network used for direct deposits, vendor payments, and bill pay.
ACH vs Wire Transfer
ACH is a batched, low-cost bank network (1-3 business days, often free); wire transfers are real-time, single-transaction, and typically cost $15-$50.
Audit Trail
A chronological record of all actions taken on financial data (payments, edits, deletions) — used to verify accuracy and defend against IRS or other audits.
B
B-Notice
An IRS notice (CP-2100 or CP-2100A) sent to a payer indicating that a TIN/name combination on a filed 1099 does not match IRS records.
Backup Withholding
A 24% federal tax that a payer must withhold from contractor payments when the contractor fails to provide a valid TIN or has been flagged by the IRS.
Beneficial Ownership
The natural person(s) who ultimately own or control 25%+ of a legal entity — required disclosure under FinCEN's Corporate Transparency Act rules.
Booth Rental
A compensation model where a salon professional pays the salon for use of a workstation rather than receiving wages or commissions from the salon.
Booth Renter Misclassification
When a salon labels a worker as a "booth renter" or "contractor" but the working relationship actually meets the IRS criteria for employment, triggering back payroll taxes and penalties.
C
Calendar Year
The standard January 1 to December 31 reporting period — the period that determines 1099 reporting for almost all US small businesses.
Cash Basis Accounting
An accounting method where income is recognized when cash is received and expenses when cash is paid — common for small service businesses.
Chair Rental
A barbershop or salon variant of booth rental where a barber or stylist rents a single chair (typically by the day or week) rather than a full booth.
Commission Stylist
A salon professional paid a percentage of the revenue from each service they perform, rather than renting a booth or earning wages.
Corporation Exemption (1099)
IRS rule exempting most payments to C-corps and S-corps from 1099 reporting — with exceptions for attorney fees, medical payments, and a few other categories.
Corrected 1099
A 1099 form re-filed with the IRS after an error in the original — marked with the "CORRECTED" checkbox and submitted with the corrected amounts.
CP-2100
An IRS notice sent to large 1099 filers (250+ mismatches) listing TIN/name combinations that do not match IRS records.
E
E-File (1099)
Electronic filing of 1099 forms with the IRS — required for filers with 10+ forms total under TY2024+ rules; optional but recommended for smaller filers.
EIN
Employer Identification Number — a 9-digit IRS-assigned number (XX-XXXXXXX) that identifies a business entity for tax purposes.
EIN Prefix
The first two digits of an EIN (e.g., "27" or "84") that historically indicated the IRS campus or service center where the EIN was issued.
F
FinCEN
The Financial Crimes Enforcement Network — a Treasury Department bureau that administers anti-money-laundering, KYC, and beneficial ownership rules.
Fiscal Year
Any 12-month accounting period a business uses for financial reporting — for most US small businesses, this matches the calendar year (January-December).
Freelancer
A self-employed individual who provides services to multiple clients on a project or contract basis — typically paid as a 1099 contractor.
G
General Contractor
A contractor responsible for the overall management of a construction project, who hires subcontractors to perform specialized work.
Gig Worker
A worker performing short-term, on-demand, or project-based work — typically paid as a 1099 contractor through a platform (Uber, DoorDash, Upwork, etc.).
Gross Receipts
Total revenue a business receives before subtracting expenses, returns, or discounts — the top line of an income statement.
I
Independent Contractor
A self-employed worker who provides services to a business under their own control, paid on a 1099 basis without payroll tax withholding.
Independent Cosmetologist
A licensed cosmetologist (or other beauty professional) who operates as an independent business owner — booth or suite rental, own tools, own clients — rather than as an employee or commission worker at a salon.
IRIS
The IRS Information Returns Intake System — the IRS's free portal for e-filing 1099s and other information returns.
IRS 1099 Threshold
The dollar amount at which a payer must file a 1099 — $600 for tax year 2025 and earlier, rising to $2,000 starting with tax year 2026 under the OBBBA.
IRS Form 945
Annual return filed by payers reporting federal income tax withheld from non-payroll payments — including backup withholding from contractors.
ITIN
Individual Taxpayer Identification Number — a 9-digit IRS-issued TIN for individuals who have US tax obligations but are not eligible for an SSN.
K
L
Late 1099 Filing
A 1099 filed after the IRS deadline (typically January 31 for 1099-NEC) — subject to per-form penalties that increase the longer the filing is delayed.
LLC
Limited Liability Company — a US business structure that combines pass-through taxation with limited personal liability for the owners.
N
O
P
Pay Frequency
How often a business pays its contractors — typically per-job, weekly, biweekly, or monthly. Contractors set their own terms; payers follow.
Payroll Tax
Federal Social Security, Medicare, and unemployment taxes withheld and remitted by employers for W-2 employees — not applicable to 1099 contractors.
Plaid
A financial data network that lets apps securely connect to a user's bank account to read transactions, verify balances, and initiate ACH transfers.
Q
R
Reasonable Cause
An IRS standard for waiving 1099 (and other) penalties when the filer shows they exercised ordinary business care and had a reasonable explanation.
Reasonable Classification
Section 530 relief — a Safe Harbor provision protecting employers from worker reclassification penalties if they had a reasonable basis for treating a worker as a contractor.
Recipient Copy (1099)
The copy of a 1099 form furnished to the contractor (the income recipient) by January 31 — required separately from the IRS filing.
Recipient TIN
The contractor's Taxpayer Identification Number as it appears on a 1099 — sourced from their W-9 and validated against IRS records.
S
S-Corporation
A corporation that has elected pass-through taxation under Subchapter S — payments to S-corps are generally exempt from 1099 reporting (with exceptions).
Safe Harbor (1099)
IRS provisions that protect filers from penalties when small dollar errors are made on 1099 forms — generally $100 income errors or $25 withholding errors.
Salon Suite 1099
The collection of 1099 obligations that arise in a salon-suite operating model — primarily 1099-MISC Box 1 from the operator to a building landlord, and 1099-NEC for any service payments the operator makes to suite-renting artists.
Schedule C
IRS form attached to Form 1040 where sole proprietors and single-member LLCs report business income, expenses, and net profit.
Self-Employment Tax
A 15.3% federal tax on net self-employment earnings covering both the employer and employee shares of Social Security and Medicare.
Send Pay
EarnDrift's name for an ACH contractor payment run — a batched payment from the business's funding account to one or more contractors.
Sole Proprietor
An unincorporated business owned and run by one individual, with no legal distinction between the owner and the business for tax purposes.
SSN
Social Security Number — a 9-digit number (XXX-XX-XXXX) issued by the SSA that doubles as the TIN for individuals and sole proprietors.
State-Only 1099 Trap
When a contractor payment falls below the federal 1099 threshold but exceeds a state's lower threshold, requiring a state filing without a federal one.
Subcontractor
A contractor hired by another contractor (the general contractor) to perform a portion of the work — treated like any other 1099 contractor for tax purposes.
Suite Rental
A booth-rental variant where the salon professional rents a private suite (a fully enclosed room) within a larger building, typically with higher weekly rent and a written lease.
T
Tax Vault
A secure, encrypted store for W-9s, 1099 records, and TIN data — the source-of-truth for year-end filings and audit defense.
TIN
Taxpayer Identification Number — either an SSN (for individuals/sole props) or EIN (for businesses) used to identify a taxpayer to the IRS.
TIN Matching
An IRS service that lets payers verify whether a contractor's TIN/name combination matches IRS records before filing 1099s.
V
W
W-2
IRS form an employer files for each W-2 employee, reporting wages paid and taxes withheld during the year.
W-9
IRS form a contractor completes to provide their legal name, business name, address, and Taxpayer Identification Number (TIN) to a payer.
W-9 vs W-4
W-9 is for independent contractors (1099); W-4 is for W-2 employees and tells the employer how much income tax to withhold.
Worker Misclassification
Treating a worker as a 1099 independent contractor when, by IRS or state law, they should be a W-2 employee.
Workers' Compensation
State-mandated insurance covering medical costs and lost wages for employees injured on the job — generally not required for 1099 contractors.