One of my early employees was essentially a subcontractor. I didn't issue him a 1099. I thought it was optional. The IRS has a different view of optional. The fine for each missing 1099 can range from $60 to $310 depending on how late you file and whether it was intentional. Multiply that by a few workers over a few years and you have an ugly afternoon with a tax professional ahead of you.
The Basic Rule
If you pay a non-employee (individual, not a corporation) $600 or more in a calendar year for services, you must issue a Form 1099-NEC by January 31 of the following year. "Services" means labor. Plumber you brought in for a subcontract job, handyman who does odd work for you, bookkeeper who's self-employed, etc.
Note: payments to corporations generally don't require a 1099. Payments to LLCs taxed as partnerships or sole proprietors do. When in doubt, have everyone complete a W-9 before you pay them. The W-9 tells you their tax classification and gives you the information you need to file the 1099 correctly.
The Employee vs. Contractor Question
This is where things get complicated. The IRS uses a multi-factor test to determine whether someone is truly an independent contractor or actually an employee. Key factors include: does the business control how the work is done (not just the result), does the business control the financial aspects of the work, and what's the relationship type (ongoing, exclusive, etc.).
If someone works exclusively for you, uses your tools, works your hours, and follows your process, they may be an employee regardless of what your contract says. Misclassifying an employee as a contractor exposes you to back payroll taxes, penalties, and interest. It's worth a conversation with your accountant if you're in gray territory.
How to Make This Easy
Before paying any sub for the first time, hand them a W-9. File it with your records. At year-end, any sub who hit $600 or more gets a 1099-NEC. File one copy with the IRS, send one to the recipient by January 31.
Most tax software handles 1099 preparation for under $100 if you have a handful of subs. If you have more than ten, your accountant can batch-file them at a reasonable cost. The cost of filing is a small fraction of the penalty for not filing.
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Written by
Dina Good
Founder, WerkOps
Dina grew up in the trades. Her father was a contractor, then a building inspector, and the job site was her classroom long before any formal one was. She went on to own her own contracting company, which is where she first felt the pain of running a skilled trade business on bad software and worse spreadsheets. A love of data pulled her into programming, and the two worlds eventually collided into WerkOps - software built by someone who has actually been on the truck.