Can You Write Off Subcontractor Payments on Taxes?

You can write off subcontractor payments on your taxes as ordinary business expenses, and the deduction reduces your taxable income dollar for dollar. There’s no minimum dollar amount to deduct: a $500 payment to a freelance designer counts the same as a $50,000 contract with a construction crew, as long as the work was genuinely for your business. What did change for 2026 is the paperwork threshold. You now only need to file a Form 1099-NEC when total payments to a single subcontractor reach $2,000, up from the long-standing $600.1Internal Revenue Service. Form 1099 NEC and Independent Contractors

What Makes the Payment Deductible

Internal Revenue Code Section 162 allows a deduction for “ordinary and necessary” expenses of running your trade or business.2Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses Ordinary means businesses in your industry commonly pay for the same type of service. Necessary means the work is helpful and appropriate for keeping the business going. A landscaping company hiring someone to pour concrete clears both tests without effort. Paying a friend to walk your personal dog does not, even if the money leaves your business account.

The IRS draws a hard line between business expenses and personal spending. A payment that doesn’t serve a clear business purpose gets disallowed on audit, and repeated attempts to run personal costs through the business can trigger accuracy penalties. Simple rule: if the work benefits your operations and you’d pay someone to do it regardless, the cost is deductible.

Classify the Worker Correctly First

The whole deduction depends on the worker actually being an independent contractor rather than an employee. The IRS looks at three overlapping categories to decide.3Internal Revenue Service. Independent Contractor (Self-Employed) or Employee?

Behavioral control asks whether you dictate how, when, and where the person works. If you set their hours, give step-by-step instructions, and require them on-site, they start to look like an employee.

Financial control asks whether the worker invests in their own tools, markets to other clients, and can profit or lose on a job. Someone who owns their equipment and invoices multiple businesses looks nothing like someone who uses your laptop and depends on you for all their income.

Type of relationship asks whether there’s a written contract and whether the worker gets employee-style benefits like health insurance or paid time off. Giving those benefits signals employment no matter what the contract says.

No single factor decides it. The IRS weighs all three together, and calling someone a “contractor” on paper won’t protect you if the daily reality looks like employment. This is where audits get expensive, and it’s worth settling before you cut the first check.

If the IRS Says You Got It Wrong

Misclassifying an employee as a contractor triggers back-tax liability under Section 3509. You’ll owe 1.5 percent of the worker’s wages for income tax withholding you should have collected, plus 20 percent of the employee’s share of Social Security and Medicare taxes.4Office of the Law Revision Counsel. 26 USC 3509 – Determination of Employers Liability for Certain Employment Taxes Those are the reduced rates for honest mistakes. If you also failed to file the required 1099s, the rates double to 3 percent and 40 percent.

Section 530 of the Revenue Act of 1978 can shield you from that liability entirely if you filed all required 1099s, never treated anyone in a substantially similar role as an employee after 1977, and had a reasonable basis for the classification.5Internal Revenue Service. Worker Reclassification – Section 530 Relief If you’d rather come into compliance voluntarily, the Voluntary Classification Settlement Program lets you reclassify going forward for roughly 10 percent of one year’s employment tax at the reduced rates, with no interest or penalties. You apply on Form 8952 at least 120 days before the switch and must have consistently treated the workers as contractors with all 1099s filed for the past three years.6Internal Revenue Service. Voluntary Classification Settlement Program

Collect a W-9 Before You Pay

Before you write the first check, get a completed Form W-9 from every subcontractor. It captures their legal name and Taxpayer Identification Number, either a Social Security Number or an Employer Identification Number, both of which you’ll need to file a 1099-NEC later.7Internal Revenue Service. About Form W-9, Request for Taxpayer Identification Number and Certification

If a subcontractor refuses to give a TIN or provides one that’s obviously wrong, you’re required to withhold 24 percent of every payment and send it to the IRS as backup withholding until valid information arrives.8Internal Revenue Service. Instructions for the Requester of Form W-9 Getting the W-9 upfront is the single most common step businesses skip, and the one that causes the worst year-end scramble.

Filing the 1099-NEC

Starting with the 2026 tax year, you file Form 1099-NEC for any subcontractor you paid $2,000 or more in the calendar year for services in your trade or business.1Internal Revenue Service. Form 1099 NEC and Independent Contractors The threshold sat at $600 for decades and changed under the One, Big, Beautiful Bill Act. Payments below $2,000 are still fully deductible; the higher threshold only reduces the paperwork.

Deadlines

You must furnish the subcontractor’s copy by January 31 of the following year. The IRS copy is also due January 31 on paper. Electronic filers get until March 31.9Internal Revenue Service. General Instructions for Certain Information Returns (2026) Paper filers attach Form 1096 as a transmittal cover sheet.10Internal Revenue Service. About Form 1096, Annual Summary and Transmittal of U.S. Information Returns If you need more time, file Form 8809 before the original due date, provide a written reason, and know that only one 30-day nonautomatic extension is available for the 1099-NEC.11Internal Revenue Service. Form 8809 Application for Extension of Time To File Information Returns An extension with the IRS doesn’t extend the deadline for the subcontractor’s copy.

Electronic Filing Rule

If your business files 10 or more information returns of any type during the year, all of them must be e-filed. The count is combined across W-2s, 1099-MISCs, 1099-NECs, and every other information return.9Internal Revenue Service. General Instructions for Certain Information Returns (2026) For 2026 returns filed in early 2027, the IRS’s IRIS platform is the e-file system, replacing the older FIRE system.12Internal Revenue Service. Filing Information Returns Electronically (FIRE)

When a 1099-NEC Isn’t Required

Several situations don’t trigger a 1099 even though you’re paying for services:

  • Payments to C-corporations and S-corporations are generally exempt. The big exception is attorney fees, which get reported on a 1099-NEC regardless of the law firm’s structure. Payments to partnerships are still reportable.13Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC
  • Payments made by credit card, debit card, or a third-party processor like PayPal or Venmo are reported by the processor on Form 1099-K, so you don’t also issue a 1099-NEC for those amounts. The 1099-K threshold was reinstated at $20,000 and 200 transactions under the same legislation that raised the 1099-NEC threshold.14Internal Revenue Service. IRS Issues FAQs on Form 1099-K Threshold Under the One, Big, Beautiful Bill
  • Total annual payments to a contractor under $2,000. Still deductible, no form required.

Foreign Subcontractors Follow Different Rules

If your subcontractor is a non-U.S. person or entity, the 1099-NEC system doesn’t apply. You collect Form W-8BEN from foreign individuals or W-8BEN-E from foreign entities instead of a W-9.15Internal Revenue Service. About Form W-8 BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting The default withholding rate on U.S.-source payments is 30 percent, which a tax treaty may reduce.16Internal Revenue Service. Federal Income Tax Withholding and Reporting on Other Kinds of US Source Income Paid to Nonresident Aliens Report the payments on Form 1042-S rather than a 1099-NEC.17Internal Revenue Service. Instructions for Form 1042-S (2026) The deduction is still available; the mechanics for the paperwork just aren’t the ones covered above.

Where the Deduction Goes on Your Return

Sole proprietors put subcontractor costs on Line 11, Contract Labor, of Schedule C. That amount reduces the net profit that flows to your Form 1040.18Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040) Do not put these payments on Line 26, Wages, which is only for employees paid through payroll.

Partnerships, S-corporations, and C-corporations deduct subcontractor costs on their respective labor or services expense lines. The specific line varies by return type, but the effect is the same: the payments reduce the business’s taxable income before anything reaches the owners.

One detail worth flagging: you have to actually file the 1099-NECs to support the deduction. The IRS cross-references your contract labor amount against the 1099-NECs in its system. A large deduction with no matching 1099s is one of the more reliable ways to draw a correspondence audit.

Penalties for Filing Mistakes

Late or incorrect 1099-NEC filings carry per-form penalties that grow the longer you wait. For returns due in 2026:19Internal Revenue Service. Information Return Penalties

  • Up to 30 days late: $60 per form.
  • 31 days late through August 1: $130 per form.
  • After August 1 or never filed: $340 per form.
  • Intentional disregard: $680 per form with no annual cap.

Small businesses with average annual gross receipts of $5 million or less get reduced annual caps: $239,000, $683,000, and $1,366,000 across the three tiers.20Internal Revenue Service. 20.1.7 Information Return Penalties Those numbers sound generous until you realize the IRS assesses separate penalties for failing to file with the government and for failing to furnish the statement to the payee, so each missed form can effectively cost you twice.

Records to Keep, and For How Long

General business tax records should be kept at least three years from the date you file the return claiming the deduction. Employment tax records, which include copies of filed information returns, need at least four years.21Internal Revenue Service. Employment Tax Recordkeeping Because subcontractor payments sit at the intersection of both, four years is the safer benchmark.

The file for each subcontractor should hold a signed W-9, copies of every 1099-NEC you filed, proof of payment (bank statements, canceled checks, or electronic transfer records), and any written contract or scope of work. If the IRS questions the classification, the contract and the W-9 are the first documents they’ll ask to see.