1099 Forms in Texas: Deadlines, Franchise Tax, and Penalties

A Texas business that pays an independent contractor $600 or more during the year must file a federal 1099 form with the IRS and send a copy to the contractor, the same as any business in any other state. There is no separate Texas state 1099 filing, because Texas has no personal or corporate income tax. What Texas does have is the Franchise Tax, and the way you report contractor payments on those 1099s directly affects which margin calculation gives you the lowest state tax bill.

Which 1099 Form You File

Two forms cover almost every situation a Texas business runs into.

Form 1099-NEC reports nonemployee compensation of $600 or more paid during the year. A freelance web developer, a consulting partnership, a solo bookkeeper: if you paid them at least $600 for services, you owe them and the IRS a 1099-NEC.¹

Form 1099-MISC covers other payments of $600 or more, including rent, prizes, and medical or health care payments. Royalties have a lower threshold of $10.²

Payments to C-corporations and S-corporations generally don’t require a 1099. Two exceptions matter: payments for legal services and payments for medical or health care services must be reported even when the payee is a corporation.³

Payments Through PayPal, Venmo, and Credit Cards

When you pay a contractor through a third-party payment platform, the platform, not you, handles the reporting on Form 1099-K. Under the threshold restored by the One, Big, Beautiful Bill Act, a third-party settlement organization files a 1099-K only when payments to a single payee exceed $20,000 and the number of transactions exceeds 200 in a calendar year.⁴

The practical rule: don’t issue a 1099-NEC for payments that already flowed through a covered platform. But if you paid the same contractor partly by check and partly through Venmo, the check portion still needs a 1099-NEC if it hits $600. Track payment method by contractor so you know which side of the line each dollar sits on.

Deadlines and Electronic Filing

Form 1099-NEC has the tightest deadline. Both the recipient copy and the IRS copy are due by January 31, with no automatic extension.¹

Form 1099-MISC gives you more room on the IRS side. The recipient copy is still due January 31, but the IRS filing deadline is February 28 for paper and March 31 for electronic submissions.¹

If your business files 10 or more information returns of any type combined during a calendar year, you must file electronically.⁵ That count is cumulative across 1099s, W-2s, and every other information return, so a small operation can hit it faster than you’d expect.

The IRS is retiring its legacy FIRE system after filing season 2027 and moving filers to the Information Returns Intake System (IRIS). The application for an IRIS Transmitter Control Code takes about 45 business days, so register well ahead of the filing you need it for.⁶

Getting a W-9 and Backup Withholding

Before you cut the first check, get a completed Form W-9. The W-9 gives you the contractor’s legal name, address, and Taxpayer Identification Number, and you need all three to file a correct 1099. Chasing this information in late January, when the contractor has no reason to respond quickly, is where most filing problems begin.

If a contractor refuses to provide a W-9 or gives you one that’s incomplete, you’re required to withhold 24% of every reportable payment and send it to the IRS as backup withholding. There’s no grace period for nonemployee compensation.⁷

The IRS also runs a free TIN Matching service that verifies a contractor’s name and TIN combination before you file. Running your list through it in early January catches transposed digits and misspellings that would otherwise generate a penalty notice months later. You need to register on the IRS Payer Account File to use it, so set the account up before filing season.⁸

Texas Has No State 1099 Filing

Texas imposes no personal or corporate income tax, so no state agency is waiting for copies of your federal 1099s.⁹ Texas also does not participate in the IRS Combined Federal/State Filing Program, which forwards 1099 data to participating state tax agencies. Your obligation is finished once you file with the IRS and furnish the copies to your recipients.

The simplicity extends to out-of-state contractors. A contractor based in New York doing remote work for your Austin company still gets a federal 1099 from you, but there is no Texas income tax to withhold from their pay.

How Your 1099 Payments Change the Texas Franchise Tax

Most entities doing business in Texas owe the Franchise Tax: corporations, LLCs, partnerships, and most other legal entities.⁹ For 2026, entities with annualized total revenue of $2.65 million or less owe no franchise tax but still have to file a Public Information Report or Ownership Information Report.¹⁰

Franchise tax is calculated on your entity’s “margin,” and you pick the method that produces the lowest tax:

Total revenue times 70%
Total revenue minus cost of goods sold (COGS)
Total revenue minus compensation
Total revenue minus $1 million

Your mix of W-2 employees and 1099 contractors changes which of these methods works out best.⁹

Contractor Payments Don’t Count as Compensation

If you use the compensation deduction, the amount you can subtract is based on wages reported on Form W-2, plus benefits. Payments to independent contractors reported on Form 1099-NEC don’t qualify. The Texas Tax Code defines “wages and cash compensation” by reference to the Medicare wages and tips box on Form W-2, and limits the deduction to amounts paid to officers, directors, owners, partners, and employees.¹¹

Two Texas businesses spending the same $500,000 on labor end up in different places. The one paying W-2 employees can deduct all of it under the compensation method. The one paying independent contractors cannot, and its franchise tax bill goes up as a result.

When Contractor Payments Fit Into COGS

Contractor payments can reduce your franchise tax through the COGS deduction, but the rules are narrow. The Texas Comptroller allows 1099 labor in the COGS calculation only when the costs are directly allocable to acquiring or producing goods and the business owns the goods being produced. A construction company paying subcontractors to build homes it owns and sells can likely include those payments. A marketing firm paying freelance designers cannot, because it doesn’t produce or own tangible goods.¹²

Because the answer to which method wins depends on your labor mix, reevaluate it every year. A shift from employees to contractors, or the other way, can change which calculation produces the lowest tax.

Penalties for Late or Wrong Filings

The IRS applies tiered penalties based on how late you correct the problem. For information returns due in 2026, the penalty per form is:¹³

$60 per return if you file a correct return within 30 days of the due date
$130 per return if you correct it after 30 days but by August 1
$340 per return if you file after August 1 or never file at all
$680 per return if the IRS determines you intentionally disregarded the filing requirement

These add up quickly. A business that fails to file 50 correct 1099-NECs and doesn’t fix the problem by August 1 is looking at $17,000 in penalties before anyone examines the underlying tax issue. Small businesses with average annual gross receipts of $5 million or less get reduced annual maximums, but the per-form amounts don’t change.¹⁴

A parallel penalty under 26 U.S.C. § 6722 applies for failing to furnish correct statements to the payee. The dollar amounts mirror the filing penalties, so a single botched 1099 can trigger two separate assessments: one for the IRS copy and one for the recipient copy.

Misclassifying an Employee as a Contractor

The most expensive 1099-related mistake a Texas business can make is treating someone as an independent contractor who should have been a W-2 employee. When the IRS or the Department of Labor makes that determination, the consequences run across several tax and insurance obligations at once.

At the federal level, you become liable for the unpaid employer share of Social Security and Medicare taxes, plus potentially the employee’s share that should have been withheld. The IRS can also assess penalties for failure to withhold income taxes and failure to file correct employment tax returns. Whether those penalties come at reduced or full rates depends largely on whether you filed 1099s consistently for the affected workers. Businesses that filed 1099s every year get a materially lower assessment than those that filed none.

In Texas, misclassification also triggers liability for unpaid unemployment insurance contributions through the Texas Workforce Commission, and can create exposure for workers’ compensation coverage that should have been in place.

The Voluntary Classification Settlement Program

If you recognize a misclassification problem and want to fix it going forward, the IRS Voluntary Classification Settlement Program lets you reclassify workers as employees with reduced penalties. You pay roughly 10% of one year’s employment tax liability, and in return the IRS waives interest, penalties, and any employment tax audit for prior years.¹⁵

To qualify, you must have consistently treated the workers as independent contractors and filed all required 1099 forms for them for the previous three years. You also cannot be under an active employment tax audit by the IRS, the Department of Labor, or a state agency. File Form 8952 at least 120 days before you want the reclassification to take effect.¹⁵

Fixing a 1099 After You’ve Filed

Errors happen. The fix depends on what went wrong.

For a wrong dollar amount or code, file a new 1099 with the “CORRECTED” box checked, enter the correct figures, submit it with a new Form 1096, and send a corrected copy to the recipient.¹⁶

For a wrong payee name or TIN, the process takes two filings. First, submit a corrected return that zeros out the dollar amounts on the original. Then file a brand-new return, without the “CORRECTED” box checked, carrying the right name, TIN, and figures. On the Form 1096 for the second filing, note “Filed To Correct TIN” or “Filed To Correct Name” in the bottom margin.¹⁶

If you were required to file the originals electronically, the corrections have to be electronic too.

1
Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC (04/2025)
2
Internal Revenue Service. About Form 1099-MISC, Miscellaneous Information
3
Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC (Rev. April 2025)
4
Internal Revenue Service. IRS Issues FAQs on Form 1099-K Threshold Under the One, Big, Beautiful Bill
5
Internal Revenue Service. Topic No. 801, Who Must File Information Returns Electronically
6
Internal Revenue Service. Filing Information Returns Electronically (FIRE)
7
Internal Revenue Service. Instructions for the Requester of Form W-9
8
Internal Revenue Service. Taxpayer Identification Number (TIN) Matching
9
Texas Comptroller of Public Accounts. Franchise Tax Overview
10
Texas Comptroller of Public Accounts. Texas Franchise Tax Report Forms for 2026
11
State of Texas. Texas Tax Code Chapter 171 – Franchise Tax
12
Cornell Law School – Legal Information Institute (LII). 34 Texas Admin Code 3-588 – Margin: Cost of Goods Sold
13
Internal Revenue Service. Information Return Penalties
14
Office of the Law Revision Counsel. 26 USC 6721 – Failure to File Correct Information Returns
15
Internal Revenue Service. Voluntary Classification Settlement Program
16
Internal Revenue Service. General Instructions for Certain Information Returns