How do I handle 1099s for subcontractors?
The key to handling 1099s is collecting the right information before you pay anyone. Get a W-9 from every subcontractor before their first payment. This gives you their legal name, business name if different, address, and tax identification number. Trying to chase down this information in January when you’re preparing 1099s is frustrating and often unsuccessful.
You must issue a 1099-NEC to any subcontractor you paid $600 or more during the calendar year for services. The form changed a few years back. Nonemployee compensation moved from 1099-MISC Box 7 to its own form, the 1099-NEC. Use 1099-NEC for labor and services. Materials you purchase from a supplier don’t require a 1099.
The $600 threshold applies to total payments for the year, not per payment. Five $200 payments to the same subcontractor equals $1,000, which triggers a 1099. Track your payments by vendor throughout the year so you know who crosses the threshold.
Payments to corporations generally don’t require a 1099. If the W-9 shows the subcontractor is an LLC taxed as a corporation, S-corp, or C-corp, you typically don’t need to file one. Sole proprietors, partnerships, and single-member LLCs taxed as disregarded entities do require 1099s.
The deadline is January 31. That’s when copies must be in subcontractors’ hands and when electronic filings are due to the IRS. Miss it and penalties start at $60 per form and increase depending on how late you file. Intentional disregard can push penalties much higher.
You can file 1099s through the IRS directly using their IRIS system, through accounting software like QuickBooks, or through your tax preparer. Filing electronically is required if you’re submitting 10 or more information returns. Most businesses with multiple subs will hit that threshold quickly.
If a subcontractor refuses to give you a W-9, you’re supposed to withhold 24% of their payment as backup withholding and remit it to the IRS. In practice, most business owners just don’t hire subs who won’t provide a W-9. It’s not worth the hassle.
Construction businesses and other trades typically have the heaviest 1099 filing requirements because subcontracting is built into how work gets done. A general contractor might issue 20 or 30 1099s in a year. Getting the process right from the start saves hours of scrambling and potential IRS penalties.
Keep your subcontractor records organized throughout the year. A simple spreadsheet tracking each sub’s W-9 status and total payments makes January much easier. Or use accounting software that tracks 1099 vendors automatically and flags who needs a form at year end.
If you’re not sure whether your 1099 process is set up correctly, your small business tax preparer can review your vendor list and help you get compliant before filing deadlines arrive.
The Treasure Valley's Tax and Accounting Team
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