How do I handle subcontractor payments in my books?
Before you pay a subcontractor for the first time, collect a completed W-9 form. This gives you their legal name, business entity type, and tax ID number. You need this information to file 1099s at year end, and it is much easier to get it upfront than to chase people down in January. Make it part of your onboarding process for every new sub, no exceptions.
When you record a sub payment, it should hit an expense account specifically for subcontractor costs. Don’t lump sub payments in with materials or general expenses. Create a dedicated account in your chart of accounts, something like “Subcontractor Expense” or “Contract Labor.” This separation keeps your financial statements clean and makes it obvious how much you’re spending on outside labor versus your own crew or materials.
If you’re running multiple projects, every sub payment also needs to be coded to the specific job it belongs to. A plumbing sub who works on three different projects should have their invoices split accordingly. This is what makes job costing actually work. Without that job-level detail, you might know your total sub spend for the month but you won’t know which projects are profitable and which ones are eating your margins. If you’re in the construction space, proper construction job costing depends on getting this right consistently.
Keep the subcontractor’s invoice attached to every payment in your accounting software. QuickBooks Online lets you attach documents to transactions, and you should use this feature. If you’re ever audited or if there’s a dispute about what was agreed upon, having the invoice linked to the payment tells the whole story.
Track cumulative payments per subcontractor throughout the year. Anyone you pay $600 or more in a calendar year needs to receive a 1099-NEC by January 31 of the following year. If you’re coding payments properly and your sub vendors are set up correctly in QuickBooks, pulling this data at year end takes minutes instead of hours. Note that you generally don’t issue 1099s to corporations, which is one reason the W-9 matters. It tells you the entity type.
Pay subs from your business bank account, not with cash and not from a personal account. Every payment needs a clear paper trail. Checks and bank transfers create that trail automatically. Cash payments are harder to document and raise red flags if you’re audited.
One common mistake is recording a sub payment as employee wages. Subcontractors and employees are treated very differently for tax purposes. Misclassifying workers can result in penalties from the IRS and the state of Arizona. If someone works set hours under your direct supervision using your tools, they’re likely an employee regardless of what your agreement says.
The timing of recording expenses matters too. If you’re on accrual basis accounting, you should record the expense when the sub completes the work and invoices you, not when you actually cut the check. On cash basis, you record it when the payment goes out. Most small businesses in the Phoenix area use cash basis, but either way you need to be consistent.
Getting sub payments right from the start saves you from expensive cleanup later and keeps you compliant at tax time. If you’re not sure your books are set up to handle this properly, working with a small business accounting firm that understands contractor workflows can get you on the right track quickly.
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More Questions
How do I set up QuickBooks Online for my business?
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Every expense needs to be tied to a specific job. That means tracking labor hours per site, coding materials to the right project, and allocating shared costs so you can see true profitability on each job.
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Track reimbursable expenses as billable to specific clients so they don't hit your P&L until resolved. The key is having a system that flags unbilled expenses so nothing falls through the cracks.
Read answerCan my bookkeeper help me prepare for a business audit?
Yes. A good bookkeeper keeps your records organized, accounts reconciled, and documentation accessible, which is the foundation of a smooth audit. The real preparation happens throughout the year with accurate, consistent bookkeeping.
Read answerHow do I get customers to pay their invoices on time?
Start with clear payment terms before work begins, make it easy to pay electronically, and follow up consistently when invoices go past due. Most late payments come from unclear expectations or friction in the payment process, not customers trying to avoid paying.
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Track general liability, workers' compensation, builder's risk, vehicle, and equipment insurance in separate accounts. Each one affects your books differently, and lumping them together makes it impossible to accurately cost jobs or set overhead rates for bidding.
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