How do I track subcontractor payments for tax purposes?
Collect a W-9 from every subcontractor before you pay them the first time. The W-9 gives you their legal name, address, and tax identification number. Without it, you can’t file their 1099 at year-end and you may face backup withholding requirements. Make W-9 collection part of your standard process for bringing on any new sub.
In your accounting software, create a vendor record for each subcontractor and code every payment to them. QuickBooks tracks cumulative payments by vendor throughout the year, so when January comes around you can quickly see everyone who crossed the $600 threshold and needs a 1099-NEC. This only works if you’re consistent about recording payments through the software instead of paying out of petty cash or personal accounts.
Keep the invoice or documentation from your subcontractor tied to each payment. This proves what work was performed and supports the deduction if you’re ever audited. A bank transfer alone doesn’t show that the expense was legitimate business-related work. The IRS wants to see what you paid for, not just that you paid.
The 1099-NEC deadline is January 31 for both the subcontractor copy and the IRS filing. Miss it and penalties start at $60 per form, increasing the longer you wait. If you use 15 subcontractors over the course of a year, late filing costs you $900 in penalties before interest. That’s money you could have kept by staying organized throughout the year.
A common mistake is not issuing 1099s to LLCs. You still need to send 1099s to single-member LLCs and partnerships. Only C corporations and S corporations are exempt from 1099 reporting. When the W-9 shows an LLC, check the tax classification box to determine whether a 1099 is required.
Cash payments require extra attention. If you pay a sub in cash and don’t record it, you lose the deduction and you’re still legally required to issue a 1099. Cash without documentation creates problems on both sides of the equation. Construction contractors who pay day laborers or small subs in cash sometimes skip the paperwork, but this creates real tax liability.
For businesses that use multiple subs on each project, consider coding payments by job as well as by vendor. This helps with job costing so you know the true expense of each project, and it keeps your subcontractor records organized for tax purposes.
Working with a bookkeeper near Gentry who understands subcontractor tracking means these records get maintained throughout the year instead of scrambling in January. Missing W-9s get flagged early, payments get categorized correctly as they happen, and 1099 preparation becomes straightforward instead of a last-minute scramble.
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