How do I track subcontractor expenses and 1099 payments?

Everything starts with a W-9. Before you pay any subcontractor for the first time, collect a completed W-9 form from them. This gives you their legal name, business name, address, and tax identification number. You need all of this to file their 1099 at year end. Chasing down W-9s in January when you’re trying to file is one of the most common and most avoidable headaches in small business accounting.

In your accounting software, set up each subcontractor as a vendor. Include their W-9 information in the vendor profile so it’s there when you need it. Every time you pay them, record the payment under their vendor profile with the date, amount, check or transaction number, and a description of the work. If you’re in construction or a similar trade, you’ll also want to tie each payment to a specific job or project so you can track profitability at the job level.

Categorize subcontractor payments as “Contract Labor” or “Subcontractor Expense” in your chart of accounts. Don’t lump them in with employee wages or general expenses. Keeping them in their own category makes it easy to pull a report at year end showing exactly what you paid each person. It also keeps your financial statements accurate, which matters for your business tax preparation and for understanding where your money is actually going.

At the end of the year, you’re required to file a 1099-NEC for every individual or non-corporate entity you paid $600 or more for services. The deadline for filing 1099-NEC forms with the IRS and providing copies to your subcontractors is January 31. There’s no extension for this deadline, and penalties for late filing range from $60 to $310 per form depending on how late you are. If you intentionally disregard the requirement, the penalty jumps to $630 per form.

A few things to keep in mind. You generally don’t need to send a 1099 to a corporation (S-Corp or C-Corp), but you do need to send them to LLCs taxed as sole proprietorships or partnerships. The W-9 tells you the entity type, which is another reason collecting it upfront matters. Payments made by credit card or through third-party platforms like PayPal or Venmo for goods and services are reported by those platforms on a 1099-K, so you don’t need to issue a 1099-NEC for those specific payments.

If you’ve fallen behind on tracking or have a backlog of subcontractor payments that aren’t properly recorded, get that cleaned up before year end. Reconstructing who you paid and how much from bank statements is doable but time-consuming. The sooner you get organized, the easier 1099 preparation becomes. A consistent monthly process of recording payments and keeping W-9s on file turns what feels like an overwhelming year-end task into something that practically handles itself.