How do I report subcontractor payments to the IRS?
If you paid a subcontractor $600 or more in a calendar year, you need to file a Form 1099-NEC with the IRS and send a copy to the sub. This applies to individuals, partnerships, and LLCs taxed as sole proprietors or partnerships. You generally don’t need to send a 1099 to corporations (S-corps or C-corps), but there are exceptions for legal services and a few other categories.
The most important step happens before you ever write a check. Collect a W-9 from every subcontractor before you pay them. The W-9 gives you their legal name, business name, address, taxpayer ID number, and entity type. Without it, you’re chasing people down in January when they have no incentive to respond. Make it part of your onboarding process. No W-9, no payment.
If a sub refuses to provide a W-9, you’re required to withhold 24% of their payment as backup withholding and remit it to the IRS. Nobody wants that, which is usually enough motivation for them to fill out the form.
The filing deadline is January 31. Both the subcontractor’s copy and the IRS copy are due by that date. There’s no automatic extension. Late filing triggers penalties that start at $60 per form and go up to $310 per form depending on how late you are. If the IRS decides you intentionally disregarded the requirement, it’s $630 per form with no cap.
You can file 1099s electronically through the IRS FIRE system, through your accounting software, or through a service like Track1099 or Tax1099. If you file 10 or more 1099 forms, the IRS requires electronic filing. Paper filing is only an option if you have fewer than 10 forms, and you need to use the scannable red forms ordered from the IRS. You can’t just print them on regular paper.
Throughout the year, keep your subcontractor payments organized. Every payment should be recorded with the sub’s name, amount, date, and the job it was tied to. If your books are messy or you’re not tracking sub payments by vendor, January becomes a scramble to figure out who you paid and how much. Full-service bookkeeping that tracks vendor payments consistently makes 1099 season straightforward instead of stressful.
One common mistake is paying subcontractors through cash apps or Venmo and thinking you don’t need to report it. The payment method doesn’t matter. If you paid someone $600 or more for services, it gets reported on a 1099-NEC regardless of whether you wrote a check, sent a bank transfer, or used an app.
Another thing to watch is worker classification. If someone works set hours, uses your tools, and takes direction from you on how to do the work, the IRS may consider them an employee rather than a subcontractor. Misclassification can result in back payroll taxes, penalties, and interest. California is particularly aggressive about this under AB5, so if you’re running a trade business in the LA area, get this right.
If you’re behind on 1099 filings from previous years, it’s better to file late than not at all. The penalties for late filing are lower than the penalties for intentional non-compliance. A CPA who provides bookkeeping and tax services for contractors can help you get caught up and build a system so it doesn’t happen again.
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