Paying Subcontractors: The W-9 Before the First Check, the 1099-NEC in January, and Backup Withholding for Everyone in Between

Subcontractor reporting is a January problem created in March, when the first check went out without a W-9. The obligation: a business that pays a non-employee US$2,000 or more in a year for services (the threshold the 2025 legislation raised from US$600 for payments made on or after January 1, 2026, indexed thereafter) must report the payments on Form 1099-NEC to the recipient and the IRS by January 31 of the following year; the requirement covers payments to individuals, sole proprietors, partnerships, and LLCs taxed as partnerships or disregarded entities — but not to corporations (C or S), with the exception of payments for legal services, which are reportable regardless of entity type; and the payer determines the recipient's entity type from the W-9. The W-9: Form W-9 collects the subcontractor's legal name, business name, entity type (the checkbox that determines whether a 1099 is required), address, and taxpayer identification number (SSN or EIN), with the subcontractor's certification that the number is correct and that they are not subject to backup withholding — and the W-9 is collected before the first payment, because the alternatives are worse: a subcontractor who is paid and then won't return a W-9 has left the contractor with a reporting obligation and no number to report. Backup withholding: where a subcontractor fails to provide a TIN, or provides one the IRS later notifies the payer is incorrect (the CP2100 notice process), the payer must withhold backup withholding at the statutory rate (24%) from reportable payments and remit it to the IRS (reported on Form 945) — a requirement that converts the missing W-9 from an administrative gap into a withholding obligation the contractor is liable for if ignored; the practical rule most contractors adopt is that no subcontractor is paid until a W-9 is on file, which makes backup withholding a rare event rather than a compliance program. TIN matching: the IRS's TIN Matching program lets payers verify that a name-and-TIN combination matches IRS records before filing — a free check that prevents the CP2100 notice cycle (a mismatch notice, a B-notice to the subcontractor, backup withholding if uncorrected) and that a contractor with more than a handful of subcontractors should run before January. The January process: totals by subcontractor from the books (the job-costing guide's subcontractor coding makes this a report rather than a reconstruction); the entity type from each W-9 (corporations excluded, except legal services); Forms 1099-NEC prepared for each reportable subcontractor above the threshold (electronic filing required for payers filing ten or more information returns in aggregate — most contractors with employees and subcontractors cross that line and file electronically through the IRS's system or a provider); copies to recipients and the IRS by January 31; and state filing where the state requires it (many states participate in the combined federal/state program; some require direct filing). Other 1099s a contractor meets: Form 1099-MISC for rents (equipment and yard rentals from non-corporate lessors), prizes, and certain other payments; Form 1099-NEC also for payments to attorneys for services; and the distinction that payments for materials alone (a supplier's invoice for lumber) are not reportable — payments for services, or for services and materials combined under one contract, are. The worker-classification shadow: the 1099 is the reporting consequence of treating a worker as an independent contractor — and construction is the industry where that treatment is most often wrong (the classification guide): a "subcontractor" who works only for the contractor, on the contractor's schedule, with the contractor's tools, under the contractor's supervision is an employee under the IRS's control tests and the states' often-stricter tests, and the 1099 filed for them is evidence of the misclassification rather than compliance with it; the W-9 process is the moment to ask whether the person filling it out is actually running a business. The penalties: per form, tiered by lateness (a smaller penalty for forms filed within 30 days of the deadline, larger after, and largest after August 1 or for forms not filed at all), with the per-form amounts indexed and the intentional-disregard penalty uncapped; plus the payer's liability for backup withholding that should have been withheld and wasn't; plus — in a classification examination — the employment taxes on misclassified workers. What goes wrong: paying without a W-9 (the root of every other problem); assuming an LLC doesn't get a 1099 (it does unless it's taxed as a corporation — the W-9 checkbox decides); missing the January 31 deadline because the books weren't closed; filing on paper when electronic filing is required; skipping the state; and using the 1099 to launder an employment relationship. The system that makes it routine: a W-9 as a condition of the subcontract (in the subcontract itself, with payment terms that begin when the W-9 arrives); a subcontractor file with the W-9, the certificate of insurance, the license, and the signed subcontract; TIN matching run when the W-9 is received; subcontractor payments coded in the books by payee; a December pre-run of the 1099 report to catch missing W-9s while there's time; and January 31 as a calendar deadline with the filing done electronically.

Key takeaways

• The obligation: Form 1099-NEC for each non-employee paid US$2,000 or more in the year for services (raised from US$600 for payments from 2026), due to recipients and the IRS by January 31; corporations excluded except for legal services; LLCs included unless taxed as corporations.
• The W-9 comes before the first check: it supplies the name, entity type, and TIN the 1099 needs — and a subcontractor paid without one has left you a reporting obligation with nothing to report.
• Backup withholding at 24% applies when the TIN is missing or the IRS notifies you it's wrong — a withholding obligation you're liable for; the no-W-9-no-payment rule makes it rare.
• TIN matching before filing prevents the mismatch-notice cycle; electronic filing is required at ten or more information returns in aggregate.
• The 1099 is not a classification defense: a "subcontractor" who works like an employee is an employee, and the 1099 is evidence of the misclassification — ask the question when the W-9 arrives.
• Penalties are per form and tiered by lateness, plus liability for unwithheld backup withholding — the system (W-9 in the subcontract, a subcontractor file, coded payments, a December pre-run) is cheaper than any of them.

The subcontractor compliance system

Subcontract terms: W-9, certificate of insurance, and license as conditions of payment. Subcontractor file per payee. TIN matching on receipt of each W-9. Payments coded by payee in the books. December: 1099 pre-run — missing W-9s chased, entity types confirmed, thresholds checked. January: 1099-NECs (and any 1099-MISCs) filed electronically by the 31st, recipient copies sent, state filings where required. The classification question asked at onboarding for anyone who looks like an employee. The system is a folder and a calendar; the alternative is a February of phone calls and a penalty per form.

Worked example

A general contractor pays thirty-eight subcontractors in a year. With the system: every subcontract carried the W-9 condition; the file holds thirty-eight W-9s; TIN matching flagged two mismatches in the spring (a sole proprietor who wrote his business name where his legal name belonged; an LLC that gave the owner's SSN instead of the entity's EIN), both corrected before any payment; the books code every payment by payee; the December pre-run shows twenty-nine reportable payees (nine were corporations per their W-9s), all above the threshold; twenty-nine 1099-NECs are filed electronically on January 24 with recipient copies emailed the same day, plus two 1099-MISCs for equipment rentals from non-corporate lessors; the state's combined-filing program handles the state copies. One onboarding conversation in the summer identified a framer who worked only for this contractor, on its schedule, with its tools — reclassified as an employee before the relationship became an examination. Without the system, the same contractor's prior year: fourteen W-9s missing in January, three weeks of chasing, six subcontractors unreachable (backup withholding should have applied to every payment made to them — a liability the contractor now carries), the forms filed in late February on paper (electronic filing was required at his volume), and a penalty notice per late form in the summer. Same thirty-eight subcontractors; one folder's difference.

Official sources

The IRS explains that Form 1099-NEC is used to report nonemployee compensation paid in the course of a trade or business to a person who is not an employee, when payments reach the reporting threshold for the year, and that the form is due to the recipient and the IRS by January 31. — Internal Revenue Service, About Form 1099-NEC, https://www.irs.gov/forms-pubs/about-form-1099-nec

The IRS explains that a payer must withhold backup withholding at the statutory rate from reportable payments when the payee fails to furnish a correct taxpayer identification number or the IRS notifies the payer that the TIN is incorrect, and that Form W-9 is used to obtain the payee's TIN and certification. — Internal Revenue Service, Backup withholding, https://www.irs.gov/businesses/small-businesses-self-employed/backup-withholding

Practitioner note

Subcontractor reporting is a January deadline created by a March payment made without a W-9, and the entire compliance system fits in one rule: nobody gets paid until the W-9 is in the file. We write it into the subcontract, run TIN matching on receipt, code payments by payee so the January report is a report, and ask the classification question at onboarding — because the 1099 filed for a worker who is really an employee is evidence for the examiner, not compliance.

See also: For related guidance, see starting a construction business: the year-one setup list; and browse every small business tax guide, by situation.

Next step

Fairlight handles subcontractor compliance systems — W-9 collection and TIN matching, backup-withholding procedures, 1099-NEC and 1099-MISC preparation and electronic filing, and worker-classification review at onboarding. See pricing or book a call.