If you use subcontractors in your contracting business — and most contractors do — you have specific IRS reporting obligations that must be met correctly every year. Failing to issue 1099s for sub payments, not collecting W-9s before work begins, or misclassifying employees as subcontractors are among the most common and costly compliance mistakes contractors make. This guide walks you through everything you need to know about handling subcontractor payments and 1099 reporting correctly.
Who Requires a 1099-NEC?
You must issue a 1099-NEC (Nonemployee Compensation) to any individual or unincorporated business (sole proprietor, partnership, or single-member LLC) you paid $600 or more during the tax year for services in the course of your business. For contractors, this includes subcontractors who performed trade work (framing, plumbing, electrical, painting), day laborers paid as independent contractors, consulting or professional services providers, and freelancers or one-time service providers. Corporations (including S-Corps) generally do not require a 1099 — but you should verify their entity type on their W-9 before excluding them.
The W-9: Collect It Before Work Begins
The W-9 form collects the information you need to issue a 1099: the recipient’s legal name or business name, entity type (individual, sole proprietor, LLC, corporation, etc.), Tax ID number (Social Security number for individuals, EIN for businesses), and address. The golden rule: always collect a completed and signed W-9 before a subcontractor starts work. Trying to collect W-9s in January from subs who worked for you in August is a miserable process — many won’t respond, some will have moved, and you’ll face 1099 deadlines with missing information. Make W-9 collection a non-negotiable part of your sub onboarding process. Store all W-9s in a dedicated file (digital or physical) organized by year.
Tracking Subcontractor Payments in QuickBooks
QuickBooks automates most of the 1099 process if you set it up correctly. When you add a vendor (subcontractor) in QuickBooks, mark them as a “1099 contractor” in their vendor profile. Enter all payments to subs as bills in QuickBooks (not as expense transactions) — this creates a proper accounts payable trail. At year-end, run the 1099 Transaction Detail report in QuickBooks to see every payment to every 1099-eligible vendor, totaled for the year. For subs who were paid $600 or more, QuickBooks pre-populates the 1099 data for e-filing directly through QuickBooks. This automation saves enormous time and significantly reduces errors.
1099-NEC Filing Deadlines
1099-NEC forms must be provided to recipients AND filed with the IRS by January 31st of the following year. There is no extension for the January 31st deadline for 1099-NECs (unlike some other 1099 types). California requires separate 1099 reporting to the FTB as well. File on time — penalties for late or missing 1099s range from $60 to $630 per form depending on how late they are and your business size. E-filing through QuickBooks or a 1099 filing service is the fastest and most reliable way to meet the deadline.
The Independent Contractor vs. Employee Question
Before paying any worker as an independent contractor (1099), verify they actually qualify as one under California’s AB5 ABC test. In California, a worker is presumed to be an employee unless the hiring entity can demonstrate all three of these: (A) the worker is free from control and direction, (B) the work is outside the usual course of the hiring business’s work, and (C) the worker is customarily engaged in an independently established trade or business. For most contractors, workers who perform your core trade work and work regularly for you fail conditions B and C and must be classified as employees. The penalties for misclassification — back taxes, penalties, workers’ comp liability, EDD assessments — can be devastating for small contractors.
Lien Releases When Paying Subcontractors
When you pay a subcontractor on a project, obtain a lien release in exchange for payment. A Conditional Waiver and Release on Progress Payment confirms that when the check clears, the sub waives lien rights up to the amount paid. An Unconditional Waiver confirms they’ve been paid and have no further lien claims up to that amount. Collecting lien releases protects you from having a sub record a mechanics lien on a project you’ve already paid them for. This documentation also confirms in your records that sub payments were made and acknowledged.
Frequently Asked Questions
What if a subcontractor refuses to provide a W-9?
If a vendor refuses to provide a W-9, the IRS requires you to withhold 24% of payments (backup withholding) and remit to the IRS. In practice, most legitimate subs will provide a W-9 when they understand it’s a legal requirement. If a sub refuses, it often signals they’re not reporting their income properly — which is their problem, but you need the W-9 to protect yourself. Consider not using subs who refuse to provide proper documentation.
For more information, see our guide on managing payroll for your crew.
For more information, see our guide on job costing for each project.
For more information, see our guide on subcontractor tax deductions.
For more information, see our guide on avoiding IRS red flags.
Bookkeeping Champs Manages Your Sub Payments and 1099s
Bookkeeping Champs tracks all subcontractor payments in QuickBooks throughout the year and prepares and e-files 1099-NECs for contractors throughout Los Angeles and Ventura County. Call (818) 679-4451 — never miss a 1099 deadline again.
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