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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

Should a landscaping company track revenue by client or by job?

Most landscaping companies should do both. Recurring maintenance revenue makes sense to track by client, while one-time projects like installations and hardscaping should be tracked by job so you can see profitability on each one.

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Start with a dedicated business bank account, a chart of accounts tailored to cleaning operations, and a consistent habit of categorizing every transaction. Separate income by type, track supplies and labor carefully, and reconcile monthly.

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Start by gathering your login credentials and financial documents, then let your bookkeeper review what you have. Your books don't need to be perfect before handing them off.

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How do I set up payroll for my first employee?

Start with your federal EIN, Arizona state registrations, and employee paperwork like the W-4 and I-9. Then pick a payroll service that handles withholding calculations, tax deposits, and filings so you don't have to do the math yourself.

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How do I create a budget for my small business?

Start with your actual financial data from the past 12 months, project your revenue conservatively, list every fixed and variable expense, and build in a buffer. Then compare your budget to actual results every month and adjust.

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How often should a small business reconcile its books?

At minimum, reconcile monthly. This means matching every transaction in your accounting software to your bank and credit card statements. Businesses with high transaction volume or cash handling should reconcile weekly.

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Jackrabbit Accounting is a Chandler firm serving small businesses across the East Valley and Greater Phoenix. Led by Sean Larsen, CPA, we provide bookkeeping, controller, and fractional CFO services backed by over a decade of corporate finance and Big 4 accounting experience.

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