How do subcontractors report income and expenses?
Subcontractors report income and expenses on Schedule C, which is part of your personal tax return. Unlike W-2 employees who have taxes withheld automatically, you’re responsible for tracking everything yourself and paying taxes throughout the year.
You’ll receive a 1099-NEC from any client who paid you $600 or more during the year. But every dollar you earn is taxable whether you get a 1099 or not. General contractors sometimes pay cash or skip sending 1099s for smaller amounts. That income is still reportable. Keep your own records of all payments received so you’re not relying on 1099s to tell you what you made.
Expenses reduce your taxable income, so tracking them matters. For construction and trades subcontractors, common deductions include tools and equipment, materials you supply, vehicle expenses for traveling to job sites, liability insurance, licensing fees, and phone costs. The IRS requires expenses to be ordinary and necessary for your trade. A framing hammer is ordinary for a framing sub. A hot tub is not.
Your net profit from Schedule C gets taxed twice in a sense. You pay regular income tax based on your bracket, plus self-employment tax at 15.3% to cover Social Security and Medicare. That self-employment tax surprises a lot of first-year subcontractors who didn’t realize they owe more than just income tax.
Quarterly estimated tax payments are required. The IRS expects you to pay as you go, with payments due in April, June, September, and January. Most subcontractors should set aside 25 to 30 percent of every payment they receive. Waiting until April to pay everything at once triggers underpayment penalties.
Keep bank statements, invoices, receipts for purchases, and mileage logs if you claim vehicle expenses. Store these for at least three years, though seven is safer if the IRS ever questions something.
Many subcontractors overpay taxes because they don’t track deductible expenses properly or miss deductions they’re entitled to. Working with Nampa tax professionals who understand subcontractor finances can help you set up tracking from the start and make sure you’re not leaving money on the table when you file.
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