How do I handle subcontractor payments in my books?
Collect a W-9 from every subcontractor before you make the first payment. This gives you their legal name, business name, address, and tax ID number. You will need all of this when it’s time to file 1099s at year end. Chasing down W-9s in January while you’re trying to meet filing deadlines is stressful and completely avoidable. Make it part of your process before any work begins.
Record each payment as a subcontractor expense in your accounting software. In QuickBooks Online, set up a dedicated expense account for subcontractor payments rather than lumping them into a generic “contract labor” or “other expenses” category. This keeps your profit and loss statement clean and makes things easier for your accountant at tax time.
If your business is project-based, assign every subcontractor payment to the correct job. A painter you hired for the Elm Street renovation should have that invoice coded to that specific project, not floating in a general subcontractor bucket. Without job-level detail you can’t tell whether individual projects are profitable or whether sub costs are quietly eating your margins. A QuickBooks ProAdvisor in Long Beach can help you configure your chart of accounts and project tracking so this is easy to maintain from the start.
Track cumulative payments to each subcontractor throughout the year. Anyone you pay $600 or more during the calendar year needs to receive a 1099-NEC form by January 31 of the following year. If you’re not tracking running totals as you go, you’ll be pulling reports and verifying amounts under pressure at year end. QuickBooks handles this well when your vendors are set up with complete tax information from day one.
Always pay subcontractors from your business bank account. Payments made through a personal account won’t appear in your business books unless you manually record them, and they create a messy paper trail. Use checks, ACH transfers, or a payment platform so every transaction flows through your business records automatically.
Keep copies of subcontractor invoices or agreements alongside your payment records. If the IRS ever questions a deduction, a bank statement showing a $4,000 payment to someone is not enough. The invoice or contract provides the context for what work was done, when it was performed, and the agreed-upon amount.
One thing worth paying attention to is the distinction between subcontractors and employees. The IRS looks at factors like how much control you have over the work, whether you provide tools and equipment, and the nature of the relationship. Misclassifying an employee as a subcontractor can lead to back taxes, penalties, and interest. If someone works set hours at your location using your tools and only works for you, they probably don’t qualify as a subcontractor regardless of what your agreement says.
The system for handling subcontractor payments doesn’t need to be complicated. Collect the W-9 upfront, record every payment under the right account and job, pay from your business account, and keep invoices on file. Do that consistently and your books stay clean all year. When January arrives, 1099 preparation becomes a straightforward process instead of a scramble.
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