1099 Reporting for Construction Subcontractors: Filing Requirements, W-9 Collection, and Backup Withholding

A general contractor who paid 40 subcontractors last year has 40 Form 1099-NECs to file by January 31. Miss the deadline and the penalties start at $60 per form. File them with wrong TINs and the IRS sends a B-notice that triggers backup withholding at 24% on every future payment to that sub until the TIN is corrected. Fail to file at all and you lose the deduction for the sub payments under IRC 6041, which means the IRS can disallow the largest expense line on your return. None of this is hard to get right, but it requires a system: collect the W-9 before the first payment, verify the TIN, track cumulative payments by vendor, and file on time. This guide covers each step, from the W-9 at onboarding to the 1099-NEC at year end.

When is a 1099-NEC required?

You must file a 1099-NEC for every person (individual, partnership, LLC taxed as a partnership or sole proprietorship, or estate) to whom you paid $600 or more during the calendar year for services performed in the course of your trade or business. The $600 threshold is cumulative for the year, not per payment. Ten payments of $100 each to the same sub trigger the requirement.

Three conditions have to be met under IRC 6041:

1. The payment is for services (not materials purchased from a supplier, unless the supplier also provides the labor).
2. The payment is made to someone who isn’t your employee (the worker classification guide covers where that line falls).
3. The payee isn’t a C-Corporation or S-Corporation.

That third point is important. Payments to corporations (including LLCs that have elected corporate tax treatment) are generally exempt from 1099 reporting. This is why the W-9 matters: box 3 of the W-9 tells you the entity type. If the sub checks “C Corporation” or “S Corporation,” you don’t file a 1099 for that vendor (with narrow exceptions for medical and legal payments). If they check “Individual/sole proprietor,” “Partnership,” or “LLC” taxed as a partnership or disregarded entity, you do.

Materials vs. services. A lumber yard that sells you framing materials doesn’t get a 1099 (that’s a purchase of goods, not services). A sub who supplies and installs the framing does get a 1099, even though part of the payment covers materials, because the transaction is primarily for services. The IRS looks at the dominant purpose of the payment. If you’re paying for the labor and the materials come along with it, it’s a service payment and reportable.

How do I collect and verify W-9s?

Get the W-9 before you cut the first check. Not after. Not at year end when your bookkeeper is scrambling to file 1099s. Before the first payment.

Form W-9 collects the sub’s legal name, business name (if different), entity type, exemptions, address, and taxpayer identification number (SSN or EIN). The form itself is simple, but the information on it drives everything downstream:

• Entity type determines whether you file a 1099.
• TIN is what you report to the IRS and what the IRS matches against the sub’s return.
• Name must match the TIN exactly as the IRS has it. “John Smith” on the W-9 with an EIN registered to “Smith Construction LLC” will fail TIN matching and trigger a B-notice.

Store W-9s securely (they contain Social Security numbers) and keep them for at least four years after the last 1099 filed for that sub.

TIN Matching. The IRS offers a free TIN Matching program that lets you verify up to 25 name/TIN combinations online (or bulk-upload via file). Run every sub through TIN Matching before you file the 1099. A mismatched TIN on a filed 1099 triggers a CP2100 or CP2100A notice (the “B-notice”) from the IRS, which requires you to send the sub a letter demanding a corrected W-9 within 30 days, and if they don’t respond, begin backup withholding at 24% on all future payments. Catching the mismatch before filing avoids the entire cycle.

What is backup withholding and when does it apply?

Backup withholding under IRC 3406 requires you to withhold 24% of every payment to a sub and remit it to the IRS. It kicks in under three circumstances:

1. The sub doesn’t provide a TIN (refuses to give you a W-9 or leaves the TIN blank).
2. The IRS notifies you that the TIN is incorrect (the B-notice process).
3. The IRS notifies you that the sub is subject to backup withholding due to underreporting.

When backup withholding applies, you withhold 24% from the gross payment, deposit it with the IRS using Form 945 (annual return for withheld federal income tax), and report the withholding in Box 4 of the 1099-NEC. The sub claims the withheld amount as a credit on their own return.

The practical problem is that most subs won’t tolerate a 24% haircut on their payments. They’ll provide the W-9. That’s exactly how the system is designed to work: the withholding is the enforcement mechanism that makes W-9 collection effective.

If a sub provides a W-9 but you don’t verify the TIN and the IRS later sends a B-notice, you’re responsible for the backup withholding you should have been collecting from the date of the notice forward. You can’t go back and collect it from prior payments (those are on you), but you must start withholding on the next payment and continue until the sub provides a corrected, verified TIN.

How do I track payments and file the 1099-NEC?

Your accounting software should track cumulative payments by vendor throughout the year. At year end, run a vendor payment report filtered to $600+ and filtered to exclude corporations. That’s your 1099 filing list.

Filing deadlines. Form 1099-NEC is due to the payee and to the IRS by January 31 of the following year. There’s no automatic extension. If January 31 falls on a weekend, the due date moves to the next business day. E-filing is required if you’re filing 10 or more information returns (1099s, W-2s, and other forms combined) under the current threshold, which dropped from 250 to 10 starting with the 2024 filing year.

Filing methods. E-file through the IRS FIRE system (Filing Information Returns Electronically), the IRS’s free online portal at IRS.gov, or through your accounting software or payroll provider. Paper filing (with Form 1096 as the transmittal) is available if you’re filing fewer than 10 forms, but e-filing is faster, produces fewer errors, and generates an acceptance record.

State filing. Most states participate in the Combined Federal/State Filing Program, which means the IRS forwards your 1099 data to participating states automatically when you e-file through FIRE. Some states (California, for example) require a separate filing. Check your state’s requirements.

What are the penalties for getting it wrong?

The IRS assesses penalties per form, per violation, and they escalate based on how late the correction is.

Filing status	Penalty per form (2025)	Maximum per year (small business)
Filed within 30 days of due date	$60	$220,500
Filed more than 30 days late but by August 1	$120	$551,500
Filed after August 1 or not at all	$310	$1,261,000
Intentional disregard	$630 (no maximum)	No cap

“Small business” for penalty cap purposes means average annual gross receipts of $5 million or less for the three prior years.

Beyond the per-form penalties, there’s a practical consequence that hits harder: under IRC 6041 and the related regulations, the IRS can disallow the deduction for subcontractor payments if you fail to file the required information returns. A GC who paid $800,000 to subs and didn’t file a single 1099 has both the penalties and the potential loss of an $800,000 deduction. In practice, the IRS doesn’t always pursue the disallowance, but it has the authority to, and it’s an easy audit adjustment.

Common 1099 mistakes in construction

Reporting materials-only purchases. You don’t need to 1099 a supplier who sells you lumber, concrete, or electrical supplies unless the payment also includes services. A supply house gets no 1099. A sub who furnishes and installs materials does.

Reporting payments to corporations. If the W-9 shows a C-Corp or S-Corp, no 1099 is required (exceptions for attorneys and medical providers). Check the entity type on the W-9, not your assumption about the sub’s structure.

Missing the $600 threshold on year-end payments. A sub you paid $500 in November and $200 in December crossed the threshold in December. If you’re not tracking cumulative totals by vendor, you’ll miss it.

Reporting gross payments when retainage was withheld. The 1099-NEC reports the amount paid, not the amount earned or invoiced. If you withheld $5,000 in retainage from a sub and haven’t released it by December 31, the 1099 for that year reflects only what you actually paid. The retainage goes on the 1099 in the year you release and pay it.

Using the wrong form. The 1099-NEC replaced Box 7 of the 1099-MISC for nonemployee compensation starting with the 2020 tax year. Subcontractor payments go on the 1099-NEC, not the 1099-MISC. Rents (for equipment rentals) still go on 1099-MISC.

What should I do next?

Build the W-9 into your subcontractor onboarding process and don’t release the first payment without one. Set your accounting software to track payments by vendor with a flag at $600. Run TIN Matching in November before you file. File electronically by January 31.

• The worker classification guide covers how to determine whether a worker is a sub or an employee in the first place, including the IRS common-law test and the ABC test.
• The insurance and bonding guide explains why your workers’ comp carrier’s audit picks up uninsured subs and charges them at your rate.
• The deductions guide covers how subcontractor payments are deducted and allocated in job costing.
• If you’re starting a new business and setting up these systems from scratch, the startup checklist walks through the full sequence.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.