1099s, Subcontractors, and Compliance: Getting It Right at the Start of the Year

For construction companies, January isn’t a slow month. While crews may be planning spring projects, the office is deep in paperwork — and near the top of that list is 1099 reporting.

Because construction firms rely heavily on subcontract labor, they typically issue far more 1099s than businesses in most other industries. That volume alone increases the likelihood of errors. And in today’s regulatory environment, mistakes involving subcontractors can lead to more than just corrected forms — they can trigger deeper scrutiny into worker classification and payroll practices.

The start of the year is more than a filing deadline. It’s an opportunity to make sure your subcontractor relationships are structured correctly.

Who Actually Needs a 1099?

One of the most common areas of confusion involves determining who should receive a Form 1099-NEC.

Generally, a 1099 is required when you pay $600 or more during the year to an unincorporated subcontractor for services. That typically includes sole proprietors and many LLCs. However, corporations (including S corporations) often do not require a 1099 — though there are exceptions for certain professional services.

Misunderstandings are common. Some contractors assume that if a vendor has an LLC, a 1099 isn’t necessary. That isn’t always true. Others overlook how credit card payments are reported differently or fail to reconcile vendor totals to their accounting records before filing.

The safest approach is simple: collect a completed Form W-9 before issuing the first payment. The W-9 confirms the subcontractor’s tax classification and provides the correct tax identification number. Waiting until January to track this information down creates unnecessary stress — and increases the risk of incorrect filings.

The Bigger Issue: Worker Classification

While 1099 reporting is important, the more significant risk often lies beneath the surface: whether a worker has been properly classified as an independent contractor in the first place.

Federal and state agencies evaluate classification based on several factors, including:

• The level of control you have over how the work is performed
• Whether the worker provides their own tools and equipment
• The permanency of the relationship
• Whether the individual operates an independent business

Construction companies can face heightened scrutiny because long-term subcontractor relationships are common. If a subcontractor works exclusively for your company, follows your schedule, uses your equipment, and is paid hourly, those facts may raise questions in an audit.

Misclassification can result in back payroll taxes, unemployment taxes, workers’ compensation exposure, penalties, and interest — costs that can quickly outweigh any perceived short-term savings.

Common Pitfalls We See

Even well-organized construction firms run into issues such as:

• Failing to reconcile 1099 totals to the general ledger
• Issuing forms with incorrect EINs or addresses
• Missing the January 31 filing deadline
• Overlooking backup withholding requirements
• Informally expanding subcontractor roles without revisiting classification

Often, 1099 errors are not intentional — they stem from inconsistent processes or rapid company growth.

Why This Matters Beyond Compliance

Accurate subcontractor reporting does more than satisfy the IRS.

Clean documentation and consistent classification practices support:

• Stronger financial reporting
• Reduced audit risk
• Greater confidence from bonding agents and lenders
• Smoother due diligence if you plan to sell or transition the business

In other words, compliance protects your long-term growth strategy.

A Smart Way to Approach the New Year

Rather than treating 1099 season as a once-a-year administrative task, consider using it as a checkpoint:

• Review your list of subcontractors and confirm proper documentation is on file.
• Evaluate long-term independent contractor relationships for classification risk.
• Standardize your process so W-9s and certificates of insurance are collected before work begins.
• Ensure your accounting system accurately tracks payments by vendor throughout the year.

A few small process improvements now can prevent significant disruption later.

Construction businesses operate in a complex regulatory environment, and subcontractor compliance continues to receive attention from both federal and state agencies. Starting the year with accurate reporting and clearly documented relationships provides peace of mind — and allows you to focus on running profitable projects.

For assistance strengthening your reporting procedures, our team is here to help you begin the year on solid ground. Visit our Construction page to learn more.