Subcontractor 1099 Tracking: 5 Mistakes That Trigger IRS Letters

The rules for subcontractor 1099s just changed, and most contractors have not caught up. Starting with payments made in 2026, you only have to issue a Form 1099-NEC when you pay a subcontractor $2,000 or more in a year, up from the old $600 threshold that had been in place since the 1950s. Sounds like less paperwork. It is also a brand new way to get a letter from the IRS, because the higher threshold does not mean you can stop tracking. It means you have to track smarter.

Here are the five subcontractor 1099 mistakes we see most often, and the IRS notice each one tends to produce.

1. No W-9 on file (or a TIN that does not match)

This is the fastest way to get an IRS letter. If the name and taxpayer ID number on a 1099 do not match IRS records, you get a CP2100 or CP2100A notice (a “B-notice”), and you can be forced to start backup withholding at 24% on everything you pay that subcontractor. The fix is boring and it works: collect a signed W-9 before you cut the first check, not at year end when the sub has moved on and stopped answering the phone. No W-9, no payment. Keep it on the vendor record in QuickBooks Online so the legal name and TIN flow straight onto the 1099.

2. Treating a worker like a subcontractor when they are really an employee

Worker misclassification is one of the things the IRS most likes to unwind, and the trades get looked at hard. If a “subcontractor” uses your tools, works your schedule, and only works for you, the IRS may decide they were an employee all along. That means back payroll taxes, penalties, and interest, and it usually starts with a notice. The fix: be honest about control. If you direct how and when the work gets done, that is an employee. When in doubt, document the relationship and keep proof of their other clients on file.

3. Issuing a 1099-NEC for payments you made by card or app

You do not report payments made by credit card, debit card, or an app like PayPal or Venmo on a 1099-NEC. The payment processor already reports those on a 1099-K. Issue a 1099-NEC for the same money and your sub gets double counted, the IRS sees more income than they earned, and the sub gets a CP2000 underreporting notice they will absolutely call you about. The fix: only put cash, check, and bank transfer payments on the 1099-NEC. Track payment method in your books so card and app payments are easy to pull out at year end.

4. Assuming the new $2,000 rule means you can stop tracking

The threshold went up, not away. You still owe a 1099-NEC to any subcontractor you paid $2,000 or more across the whole year, and “across the whole year” is where people get burned. Three $800 payments to the same sub is $2,400, which is over the line. Miss it and you are looking at failure-to-file penalties, which stack per form. The fix: track payments by vendor and by year, not by invoice. A system that totals each subcontractor automatically is the difference between a five minute January and a penalty notice. And the income is still taxable to the sub whether or not a form goes out.

5. Missing the January 31 deadline (or paper filing when you cannot)

Form 1099-NEC is due to both the subcontractor and the IRS by January 31. There is no quiet February grace period anymore. Late penalties climb the longer you wait. And if you are filing 10 or more information returns of any kind, you are required to file them electronically. Mailing a stack of paper when you were supposed to e-file is its own penalty. The fix: close your books in early January so the totals are final and the forms go out on time.

Stop dreading 1099 season

None of these are hard. They are just easy to forget when you are running jobs and chasing payment yourself. Clean vendor records, a W-9 before the first check, and a system that totals each subcontractor for you take the whole thing off your plate.