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Bookkeeping and tax for contractors: 1099-NEC for subs, job costs and 2026 numbers
Bookkeeping and tax prep for construction and trade contractors: the 2026 $2,000 Form 1099-NEC rule for subcontractors, backup withholding, the January 31 deadline, information return penalties, job costing and retainage, and the 2026 Section 179 and cash method limits.
Prepared by Aldro Accounting · Updated · Sources checked
The quick answer
For payments made in 2026, a contractor files IRS Form 1099-NEC for each subcontractor paid at least $2,000 for services (up from $600), including parts and materials supplied as part of the service. Form 1099-NEC is due to the IRS and to the subcontractor by January 31, with no automatic extension, and a subcontractor who doesn't give a correct taxpayer identification number is subject to 24% backup withholding.
Bookkeeping and tax for contractors in one place
Aldro is the cheapest way to get your business taxes done: $399 flat, with bookkeeping at $20 a month.
The flat price covers everything tax for the year: every federal and state business return you need, whether that's Schedule C, Form 1065, Form 1120-S or Form 1120, plus the information returns such as Form 1099-NEC for your subcontractors. Our team prepares and files them.
Bookkeeping covers unlimited bank and card accounts, monthly reconciliation and statements. Payroll processing and sales tax filing aren't included.
This page covers both kinds of contractor: the construction or trade business that pays subcontractors, and the independent contractor who receives a Form 1099-NEC. The IRS treats subcontractor fees as a standard example of nonemployee compensation.
Form 1099-NEC for subcontractors: the 2026 rules
For tax years beginning after 2025, the threshold for reporting nonemployee compensation and for backup withholding rose to $2,000, and it will be adjusted for inflation starting in calendar year 2027. Before that it was $600.
File Form 1099-NEC for each person you paid at least $2,000 during the year, in the course of your business, for services by someone who isn't your employee. That includes parts and materials when supplying them was incidental to the service. Payments only for merchandise, freight, storage and similar items aren't reported.
Scroll sideways to see all columns.
| Payment | How it's reported |
|---|---|
| Subcontractor labor, including incidental materials, $2,000 or more | Form 1099-NEC, box 1a |
| Payment to a C or S corporation, including an LLC taxed as one | Generally not reported |
| Attorney fees, even to a corporation, $2,000 or more | Form 1099-NEC, box 1a |
| Payment to a partnership above the threshold, such as an architecture firm | Generally reportable |
| Machine rental with an operator under one contract | Split it: machine rent on Form 1099-MISC, box 1, and the operator's charge on Form 1099-NEC, box 1a |
| Paid by credit card or a third-party network | Reported by the payment settlement entity on Form 1099-K, not on Form 1099-NEC |
| Sales tax imposed on the service provider and paid to them | Included in the Form 1099-NEC amount |
| Sales tax imposed on you as the buyer and collected by the provider | Not reported |
The 2026 revision of Form 1099-NEC adds boxes for cash tips (1b), Treasury Tipped Occupation Codes (1c) and overtime compensation (1d).
Project accounts and single-member LLC subs
When a bank finances a construction project, keeps the account the payments come from, and performs management and oversight functions over those payments, the IRS says the bank is responsible for filing the information returns for payments of $2,000 or more to contractors.
For a subcontractor that is a single-member LLC disregarded from its owner, the owner's name goes on the first name line of the form and the LLC's name on the second.
W-9s, TIN matching and backup withholding
Payers ask for a subcontractor's taxpayer identification number on Form W-9. Payers who file Form 1099-NEC can use the IRS TIN Matching e-service to check name and TIN combinations against IRS records before filing.
If a payee doesn't give a correct TIN, the payer withholds 24% from future payments. The 60-day exemption for payees awaiting a TIN applies only to interest, dividends and certain readily tradable instruments, so nonemployee compensation is subject to backup withholding even while a subcontractor waits for a TIN.
Backup withholding is reported on Form 945, and the payment and withholding go on Form 1099-NEC even if the payment is below the normal reporting threshold. A payer that doesn't collect and pay over required backup withholding may become liable for the uncollected amount.
Copies of information returns are generally kept for at least 3 years from their due date, or 4 years if backup withholding was imposed.
The January 31 deadline and e-filing
- Form 1099-NEC is filed with the IRS and furnished to the subcontractor by January 31. A due date on a Saturday, Sunday or legal holiday moves to the next business day
- No automatic extension is available for Form 1099-NEC or Form W-2
- A business filing 10 or more information returns in a year must e-file. The 10 is counted across all information return types combined
- Starting with tax year 2026, filing season 2027, the IRS Information Returns Intake System (IRIS) is the only e-file system for information returns. The older FIRE system shuts down at the end of 2026. A Transmitter Control Code application typically takes up to 45 business days
- Paper Copies A go to the IRS with Form 1096
Information return penalties for 2027
The IRS charges one penalty for each information return not filed correctly on time, and a separate one for each payee statement not furnished correctly on time. A small business, for this purpose, has average annual gross receipts of $5 million or less for the 3 most recent tax years, and gets lower yearly maximums.
Under the de minimis safe harbor, a dollar error of no more than $100, or no more than $25 for tax withheld, doesn't need a correction and isn't penalized, unless the recipient asks for a corrected statement.
Job costing, retainage and long-term contracts
The IRS Construction Industry Audit Techniques Guide describes how money moves on a job. Materials are generally delivered straight to the job site and are direct job costs, not normally inventoried. Direct labor on a long-term contract covers employees and also contract workers and independent contractors.
Retainage is usually withheld from the general contractor until the project is complete, typically 10% of the billed amount, and the percentage may drop over the life of the project. The general contractor in turn retains part of what it owes its subcontractors. Change orders are written revisions that raise or lower the total contract price.
The guide notes that a contractor normally has at least two accounting methods: an overall method such as cash, accrual or hybrid, and one or more methods for long-term contracts, such as completed contract or percentage of completion. Section 460 generally requires the percentage of completion method for long-term contracts, with exceptions for home construction contracts and for small contracts expected to be finished within 2 years by a contractor that meets a gross receipts test.
2026 tax numbers that matter to contractors
Our team applies these on your return as part of the flat yearly price.
Worked example
Say a remodeling contractor makes these payments in 2026. A framing sub, a sole proprietor, gets $9,500 for labor and the lumber used on the job: that's at least $2,000, so it goes on Form 1099-NEC, box 1a, materials included. An electrical sub organized as an S corporation gets $14,000: payments to S corporations are generally not reported. A drywall sub gets $1,500: under $2,000, so no Form 1099-NEC unless backup withholding applied. A bulldozer rented with its operator for $6,000, of which $2,500 is the operator's charge: $3,500 machine rent goes on Form 1099-MISC, box 1, and $2,500 on Form 1099-NEC, box 1a. If the framing sub never gave a TIN, 24% of the $9,500, or $2,280, would be withheld, reported on Form 945 and in box 4 of the 1099-NEC. If the 1099-NECs for 2026 went to the IRS 20 days late, the penalty would be $60 per return, plus a separate $60 for each statement furnished to a sub late.
Common questions
What is the 1099-NEC threshold for subcontractors in 2026?
$2,000, for tax years beginning after 2025. It was $600 before and will be adjusted for inflation starting in calendar year 2027.
Do I include materials on a subcontractor's 1099-NEC?
Yes, when the parts or materials were incidental to the service. Payments only for merchandise, freight or storage aren't reported.
When is Form 1099-NEC due, and can I get an extension?
By January 31, to both the IRS and the subcontractor, or the next business day if January 31 falls on a weekend or legal holiday. No automatic extension is available.
What happens if a subcontractor won't give me a W-9?
Without a correct TIN, backup withholding at 24% applies to the payments, even while the sub is waiting for a TIN. It is reported on Form 945 and on Form 1099-NEC.
Can a contractor use the cash method in 2026?
A corporation or partnership meets the Section 448(c) gross receipts test for tax years beginning in 2026 if its average annual gross receipts for the prior 3 years are $32,000,000 or less. Long-term contracts have their own rules under Section 460.
Is contractor tax preparation included in Aldro's price?
Yes. The flat yearly price covers everything tax, including your business returns, their state returns and the Form 1099-NECs for your subs.
The cheapest way to get your business taxes done: $399 flat.
Business tax filing is $399 USD a year, and it covers everything tax for that year.
How it works
- Tell us about your business. A two-minute form. No payment is collected through it.
- Get your next steps by email. We’ll email you the next steps within one business day. After you sign up we’ll send you a secure upload link for your documents.
- We file it. Our team prepares and files your return. Add bookkeeping for $20 a month if you want it.
What's included
$399 a year covers everything tax for that tax year.
- Every business return for the year. All the federal and state or provincial business returns you need for the tax year: Schedule C, 1065, 1120-S, 1120 and their state returns in the US; T2, or T1 with T2125, in Canada.
- More than one state. Multi-state returns are included at the same price.
- Your personal return. The owner’s personal return (1040 or T1) is included when it’s needed for the business income.
- Quebec. Quebec returns (CO-17, TP-1 and TP-80) are included. Our Quebec pages are in French, and our team works with you in English.
- Extensions and reminders. Extensions (Form 7004 or 4868) and quarterly estimate reminders are included.
- Information returns. 1099-NEC, T4/T4A and T5018 slips are included in the tax price.
- City and excise returns. City and local business tax returns, and state excise returns such as Washington B&O, are included in the yearly price.
- Franchise tax reports. State franchise tax reports, such as the Texas franchise tax report, are included.
- Estimated tax and instalment amounts. We work out your quarterly estimated tax payments in the US, or your CRA instalments in Canada, and tell you what to pay and when.
- Unfiled past years. Each unfiled prior-year return is $399 per tax year, the same flat price.
- Bookkeeping at $20 a month. Unlimited bank and card accounts, monthly reconciliation and monthly statements.
Basic inventory tracking for online stores, such as Shopify, is included. Full cost-of-goods reconciliation is quoted separately. Payroll processing and sales-tax filing aren’t included in bookkeeping. Prices are in USD. Our team prepares and files your return.
Sources
- IRS: Instructions for Forms 1099-MISC and 1099-NEC · checked October 31, 2026
- IRS: Publication 1099 (2026) · checked October 31, 2026
- IRS: Backup withholding · checked October 31, 2026
- IRS: Topic no. 307, Backup withholding · checked October 31, 2026
- IRS: Information return penalties · checked October 31, 2026
- IRS: Rev. Proc. 2025-32 · checked October 31, 2026
- IRS: Construction Industry Audit Techniques Guide · checked October 31, 2026
This guide explains general rules from the sources listed. It isn’t tax advice for your situation.