How do I track payments to subcontractors for tax time?
Start with the W-9. Before you pay a subcontractor for anything, get a completed W-9 form from them. This gives you their legal name, business name, address, and taxpayer identification number. You need this information to file 1099s at year end. Chasing down W-9s in January when you’re trying to file is a headache you can avoid entirely by making it part of your onboarding process. No W-9, no first check.
Pay through traceable methods only. Checks, bank transfers, ACH, Zelle, or credit card. Avoid cash whenever possible. If you do pay cash, get a signed receipt with the date, amount, and description of work. Cash payments with no documentation are a red flag during an audit and make it nearly impossible to prove the expense was legitimate.
Record every payment in your accounting software as it happens. In QuickBooks, set up each subcontractor as a vendor. When you write a check or make a payment, assign it to that vendor and categorize it as subcontractor expense. If you’re doing job costing, assign the payment to the specific project too. This gives you two things: a running total of what you’ve paid each sub for 1099 purposes, and accurate job-level cost tracking so you know your real margins.
The filing requirement is straightforward. Any subcontractor you paid $600 or more during the calendar year gets a 1099-NEC. The deadline to send the form to the subcontractor and file with the IRS is January 31. In California, you also need to file 1099s with the Franchise Tax Board. Late filing comes with penalties that start at $60 per form and go up from there depending on how late you are. If the IRS determines you intentionally didn’t file, the penalty jumps to $630 per form.
One thing that trips up a lot of contractors is the credit card exception. Payments made by credit card or through third-party payment processors like PayPal don’t require a 1099-NEC from you because the payment processor reports those through a 1099-K instead. But payments by check, ACH, cash, or Zelle all require you to file the 1099-NEC.
Keep a simple spreadsheet or report that you update monthly showing each sub’s name, total paid year-to-date, and whether you have their W-9 on file. QuickBooks can generate a vendor payment summary that does most of this for you. Reviewing it monthly means January isn’t a scramble.
The subcontractor payments themselves are deductible as a business expense, which is why tracking matters beyond just compliance. If you paid subs $150,000 last year but can only document $120,000, you’re paying taxes on $30,000 you didn’t actually keep. That’s real money lost because of sloppy record keeping.
If your books are behind or you’ve never tracked sub payments properly, full-service bookkeeping can get this organized so you’re not guessing at year end. And if you’re running a trades business in Long Beach or the South Bay, having someone who understands bookkeeping for trades businesses makes a real difference. Subcontractor tracking is one of those things that’s simple in concept but falls apart fast when you’re busy running jobs and not updating your books.
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