How to Tell If a Subcontractor Payment Needs a 1099

A subcontractor bill is not itself a 1099 decision. Start with the payment record, then identify which amounts belong in the reporting total for that payee.

This is a practical decision worksheet for business payments to U.S. subcontractors. The 2026 reporting guide covers the annual filing process; the year-end records checklist explains what to collect before using this worksheet.

Check the Work and the Payee

First confirm that the transaction was for business services performed by someone who is not your employee. Personal purchases are outside this business reporting rule. A materials-only purchase is generally excluded, but parts and materials supplied with a service can be included in nonemployee compensation.

Next read the W-9. Individuals, sole proprietors, and partnerships are generally reportable payees. Corporations are generally exempt from this service-payment reporting, with exceptions such as attorneys' fees. An LLC can have different federal tax classifications, so its name is insufficient. For a disregarded entity, use the applicable owner's information under the IRS W-9 instructions.

Worker classification must already be correct. A W-9 or a 1099 does not turn an employee into a contractor. See the worker-classification discussion if that question is unresolved.

Separate the Payment Channels Before Adding the Reporting Total

Keep checks, cash, and direct ACH service payments in the payer's review. Exclude payment-card and qualifying third-party network transactions from your 1099-NEC calculation under the IRS reporting instructions.

Do not exclude a transfer just because an app was used. Verify the transaction type and settlement arrangement. Conversely, the exclusion for a qualifying network transaction does not depend on whether the processor actually issues a 1099-K to that recipient. Processor reporting thresholds are a separate question, explained in the IRS Form 1099-K FAQs.

Apply the Threshold to the Remaining Annual Total

For payments made in 2026, the general federal 1099-NEC threshold is $2,000 or more per payee. The 2025 threshold was $600. Aggregate the qualifying payments across the year, rather than testing each invoice or each job separately. If federal backup withholding was taken, reporting is required regardless of the total.

These examples assume business service payments to a reportable U.S. sole proprietor, with no backup withholding:

• Two checks for $1,200 and $950: the reportable total is $2,150, so a 2026 1099-NEC is generally required.
• A $1,600 check and a $900 credit-card payment: the payer's 1099-NEC total is $1,600 after the card exclusion, below the general threshold. Keep both payments in the books.
• A $2,300 check for an installed trade package: do not remove the included materials merely because the invoice breaks out labor and materials. Review the full service payment.
• A $2,300 merchandise-only purchase: the amount alone does not make it nonemployee compensation.

Keep the Reason for Each Decision

For every payee, retain the annual payment total, the excluded transactions and why they were excluded, the remaining reporting total, and the W-9 classification used. Mark unresolved transactions for review instead of forcing them into an exemption.

“Below the threshold” does not mean the income becomes tax-free or that records can be discarded. It means this general filing trigger was not met, subject to exceptions and any separately applicable obligations.

Finish the Review Before Forms Are Prepared

A useful final list has three groups: ready to file, no federal 1099-NEC required under the reviewed facts, and unresolved. Attach the reason to each entry so another reviewer can reproduce the decision.

KDM Accounting Services can help reconcile that list and flag missing documentation before January. Contact KDM if the vendor ledger and payment methods do not yet support a clear answer.