How to Pay Your Subcontractors and Submit 1099s
Business owners often use subcontractors, especially in the construction industry. Contractors depend on them to complete projects instead of hiring full-time employees. And often, these subcontractors specialize in their crafts. Paying subcontractors is a different task them paying your regular employees. These self-employed individuals set their rates and pay their taxes. Here, we give you the best ways to pay your subcontractors and remain tax compliant.
Who is Considered a Subcontractor
Subcontractors are not your employees. They are workers hired to provide materials or services on a contract basis. Independent subcontractors are responsible for handling their taxes and paying their income and self-employment taxes. To ensure you are correctly classifying someone on your team, verify with the IRS. You simply supply them with a Form 1099 documenting the amounts paid to them for the period.
Ways to Pay Your Subcontractors
As a business owner, when you contract with independent contractors, you must choose a secure and easy payment method to pay them for the work they complete. There are several ways to pay your subcontractors; here, we share four methods.
The good old-fashioned way to pay your subcontractors is with a company check. There are no fees associated with paying contractors when you use a paper check. The process seems the most straightforward method, but there are drawbacks. First, sending out checks and waiting for them to clear takes a while. Some contractors aren’t comfortable with checks as the money isn’t guaranteed, and returned checks can cost them fees from their bank. Also, when you issue a check to a contractor, you’re giving your bank account information right on the payment.
Also known as direct deposit, it’s the most popular payment method. It’s easy to set up ACH transfers, especially when using QuickBooks Online, which allows you to automate payments. These paperless payments are a more secure alternative to paying with a company check. Your subcontractor must share their bank account information, but they are used to this process. It’s a safe and convenient way to manage subcontractor payments, sending the funds directly into their banking account.
The quickest way to pay your subcontractor is via a wire transfer. They usually take twenty-four hours, but it costs both parties between $15 and $30 for domestic wire transfers. Use wire transfers for payments you must get out immediately, not for recurring payments. And keep in mind that it is hard to reverse a wire transfer.
Accounting software like QuickBooks Online allows you to input multiple contractors. Here you can automate payments and keep it all simple. You invite your subcontractor to create a QuickBooks profile, complete a W-9 and enter their banking information. You then add the contractors under the “Payroll” tab and submit your payroll for direct deposit into their accounts. QuickBooks Online can track all payments and prepare 1099s for tax time.
Setting Up Your Contractors & Creating 1099s
Start by having your subcontractor complete a W-9 form. Decide how you’ll pay them, i.e., up-front, at completion, or by milestone. Then you will pay the payments when they are due. You’ll pay any required withholdings to the IRS and state taxes.
Next, you’ll complete Form 1099-NEC if you’ve paid a subcontractor over $600 during the year. You must submit the form and copies to the IRS and your subcontractor before January 31st of the following tax year.
Completing the 1099-NEC is easy. Gather the information you need from the W-9 your subcontractor completed. Then fill out Copy A & B; one will go to the IRS and the other to your subcontractor. You’ll then submit Copy A of Form 1099 electronically or send it in by mail. Send Copy B of Form 1099 to your independent contractor. If the state requires a copy, you will send Copy 1 to them. If you are mailing your submission, you must complete Form 1096 to accompany and track your physical copy of Form 1099.
Paying Your Subcontractors Made Simple
Paying your subcontractors doesn’t have to be complicated, but you must start with properly classifying them. Once you have them complete a W-9 form and agree on a payment method, the only thing left to do is pay them when the time comes and report the compensation. Devine Consulting can set up your QuickBooks Online subcontractor payments and manage your other controller, accounting, and bookkeeping needs. Partner with us today by requesting your detailed estimate or calling us at 281-545-4000.