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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.

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More Questions

What are the benefits of outsourcing bookkeeping instead of hiring in-house?

Outsourcing gives most small businesses better expertise at a fraction of the cost. You avoid a full-time salary for work that rarely fills 40 hours per week, and you get coverage that doesn't disappear when someone calls in sick or quits.

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What is a balance sheet and why does my business need one?

A balance sheet shows what your business owns, what it owes, and what's left over for you as the owner. It's essential for loan applications, tax preparation, and understanding whether your business is actually in good financial shape.

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How do I get customers to pay their invoices on time?

Late payments usually come from unclear terms, friction in the payment process, or no consequences for paying late. Fix those three things and most of your collection problems go away.

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How much does a fractional CFO cost compared to a full-time CFO?

A fractional CFO typically costs between $1,000 and $5,000 per month, while a full-time CFO runs $200,000 to $400,000 or more per year when you factor in salary, benefits, and bonuses. Most small businesses get the strategic guidance they need at a fraction of the cost.

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What is a fractional CFO and how is it different from a bookkeeper?

A fractional CFO is a part-time chief financial officer who provides strategic financial guidance without the full-time salary. A bookkeeper handles the day-to-day recording and organizing of your financial data. They serve different purposes and most growing businesses eventually need both.

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Can a virtual bookkeeper work with my local CPA at tax time?

Yes. Cloud-based accounting software like QuickBooks Online means your bookkeeper and CPA can access the same data regardless of location. Most CPAs actually prefer working with a professional bookkeeper because the books are clean and organized when tax season arrives.

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