How do I handle subcontractor payments in my books?
Collect a W-9 from every subcontractor before you send the first payment. This gives you their legal name, address, and tax identification number. You need all of this to file 1099s at year end, and chasing it down in January when you’re up against a deadline is no fun. Make it a rule that no payment goes out without a W-9 on file.
In your accounting software, set up a dedicated expense account called “Subcontractor Expense” or “Contract Labor.” Do not lump these payments in with employee wages or general operating expenses. They are a distinct category for tax purposes and need to be easily identifiable. When you record the payment, always attach the subcontractor’s name as the vendor. This seems obvious but a lot of business owners just enter a dollar amount without selecting a vendor, and then they have no way to pull a report showing total payments by subcontractor when 1099 preparation time comes around.
For construction companies and field service businesses, take it a step further and assign each subcontractor payment to the specific job or project. A project can look profitable on the surface until you realize $12,000 in sub payments were never coded to it. Job-level tracking is the only way to know your true margins per project.
Track cumulative payments throughout the year. Anyone you pay $600 or more during the calendar year gets a 1099-NEC, and the filing deadline is January 31. If you’ve been recording payments correctly all year with vendor names attached, generating those totals takes minutes instead of hours.
Keep invoices from your subs and save payment confirmations for every transaction. If the IRS ever questions these expenses, you need documentation showing what work was performed, when, and how much was paid. A paper trail protects you.
One mistake that creates real problems is paying subcontractors through personal accounts or with cash and not recording the transaction in your books. Even if you reimburse yourself from the business account later, the trail gets messy. Every sub payment should flow through your business bank account so it’s clean and traceable.
Also be aware of the line between subcontractors and employees. The IRS looks at whether you control when, where, and how someone does their work. If you do, that person may legally be an employee no matter what your agreement says. Misclassification carries penalties, so talk to your CPA if you’re unsure about any of your workers.
If you’re behind on tracking subcontractor payments or your books don’t have clean vendor records, an outsourced bookkeeping team in Jacksonville can help you get organized before year end. The sooner your records are accurate, the easier everything downstream becomes, from job costing to tax filing.
The First Coast's Trusted Bookkeeping Partner
The Next Step:
A Free Discovery Call
Tell us where things stand with your books. Whether you're months behind or just looking for reliable bookkeeping going forward, we'll give you an honest assessment and a clear price.
More Questions
What are the biggest bookkeeping challenges for professional service firms?
Professional service firms struggle most with tracking accounts receivable, recognizing revenue correctly, and understanding profitability by client or project. These challenges compound when billing is inconsistent or time tracking is loose.
Read answerDo I need to issue 1099s to my subcontractors?
Yes, if you paid a subcontractor $600 or more during the calendar year. You'll file a 1099-NEC with the IRS and send a copy to the subcontractor by January 31st.
Read answerHow much does catch-up bookkeeping cost?
Catch-up bookkeeping is typically priced per project and can range from a few hundred dollars to several thousand depending on how far behind you are, your transaction volume, and how organized your records are.
Read answerDoes Florida's lack of state income tax change how I do my books?
Not in any major way. The fundamentals of good bookkeeping stay the same. You still need clean records for federal taxes, and Florida has other obligations like sales tax and reemployment tax that require careful tracking.
Read answerWhat's the difference between cash flow and revenue?
Revenue is the total amount your business earns from sales or services. Cash flow is the actual money moving in and out of your bank account. A business can show strong revenue and still struggle to pay bills if customers haven't paid yet.
Read answerHow do I create a budget for my small business?
Start with your actual numbers from the past 12 months, not guesses. List your fixed costs, estimate variable expenses by month, project revenue conservatively, and review the budget against actuals every single month.
Read answer