Contractors & Subcontractors (Form 1099-NEC) — United States Tax Rules

Deduct contractor payments on Schedule C Line 11 — issue Form 1099-NEC to any contractor paid $600+ in a tax year (due January 31).

Claimable: Fully claimable · Tax authority: IRS (Internal Revenue Service)

IRS (Internal Revenue Service) Rules

• Payments to subcontractors and freelancers for business services are deductible on Schedule C Line 11 (Contract Labor).
• Form 1099-NEC obligation: If you pay any single contractor or vendor $600 or more in a calendar year for business services, you MUST issue them a Form 1099-NEC by January 31 of the following year.
• Obtain Form W-9 from every contractor before paying them — this gives you their name, address, and Tax Identification Number (TIN/SSN/EIN) needed to complete the 1099-NEC.
• 1099-NEC is required for: graphic designers, VAs, writers, developers, and any other self-employed individuals you pay $600+ for services.
• 1099-NEC is NOT required for: corporations (S Corps, C Corps) — exception: attorneys and medical providers must be reported regardless of entity type.
• Penalties for missing 1099-NEC: $60–$630 per form depending on how late. The IRS is increasingly strict on 1099 compliance.
• Contractor vs. employee: always clarify the relationship. Misclassifying employees as contractors exposes you to back employment taxes and penalties.

Limits

No annual dollar cap on contractor deductions. Form 1099-NEC required for each contractor paid $600+ in the tax year.

Worked Example

James, a freelance developer, hires a UI designer (Sara) for $4,500 and a QA tester (individual, paid $700). He must issue 1099-NEC to Sara ($4,500) and the QA tester ($700) by January 31. He obtains their W-9s first, reports both on his Schedule C Line 11, and deducts the full $5,200.

Record Keeping

• Collect Form W-9 from every contractor before first payment — this is critical for 1099 preparation
• Track payments to each contractor with a running total throughout the year
• Retain copies of all issued Form 1099-NEC for at least 3 years
• Keep contractor invoices and payment confirmations as supporting documentation

Frequently Asked Questions

When do I need to issue a 1099-NEC?

Issue Form 1099-NEC to any individual, sole proprietor, or partnership that you pay $600 or more for business services in a calendar year. The deadline is January 31. You also file Copy A with the IRS by January 31. Corporations generally do not need to receive 1099-NECs, with exceptions for attorneys and healthcare providers.

What happens if I don't issue a required 1099-NEC?

You can still deduct the contractor payment even without issuing a 1099-NEC — the deductibility is not contingent on the 1099. However, you face penalties of $60–$630 per missing or late form. The contractor also has to report the income regardless of whether they receive a 1099.