Construction Contractors: How to Avoid the $340-Per-Form Penalty Most San Jose Builders Are Facing This Tax Season

If you're a general contractor in San Jose who paid subcontractors last year, you're facing multiple critical tax deadlines right now—and many contractors don't realize how aggressive the IRS penalty structure has become.

Here's what's changed: The IRS raised information return penalties significantly in recent years. What used to be a $50 penalty for late 1099 filing is now $60 if you file within 30 days, $140 if you file by August 1st, and a crushing $340 per form if you file after August 1st or intentionally disregard the requirement.

For a typical San Jose general contractor who paid 20 subcontractors last year, that's potentially $6,800 in penalties—just for missing paperwork deadlines. And that doesn't include the penalties for incorrect taxpayer identification numbers, failure to furnish copies to subcontractors, or the backup withholding requirements that kick in when you mess up.

But here's what most construction contractors don't understand: these penalties are completely avoidable with proper systems. The contractors who never face these issues aren't lucky—they're following a specific compliance process.

This guide will walk you through exactly what construction contractors in the Bay Area need to know about 1099 compliance, from collecting W-9 forms before you pay that first invoice, to filing your 1099-MISC and 1099-NEC forms correctly, to handling the special situations that trip up most builders.

Let's make sure you're not one of the contractors paying thousands in unnecessary penalties this year.

Understanding 1099 Requirements for Construction Contractors

Before diving into the specific deadlines and procedures, let's clarify exactly which payments require 1099 reporting for construction contractors.

When You Must Issue 1099s

You must issue Form 1099-NEC (for nonemployee compensation) or Form 1099-MISC (for other payments) when you pay:

$600 or more during the calendar year to:

• Subcontractors (electricians, plumbers, framers, concrete workers, etc.)
• Independent contractors providing services
• Materials suppliers who also provide installation services
• Equipment rental companies (when rented with operator)
• Attorneys (regardless of incorporation status)
• Unincorporated service providers

Important distinction for construction: If a supplier only delivers materials without providing labor or services, you don't issue a 1099 even if payments exceed $600. But if that supplier installs the materials or provides any service beyond simple delivery, you do need a 1099.

This distinction trips up many construction contractors in Fremont. Your lumber supplier who drops off materials? No 1099 needed. That same supplier who drops off materials AND installs them? 1099 required.

The Critical Difference: 1099-NEC vs. 1099-MISC

The IRS separated nonemployee compensation into its own form (1099-NEC) starting in 2020. Understanding which form to use is critical because they have different deadlines:

Form 1099-NEC: Use for payments to subcontractors and independent contractors for services performed

• Due to recipient: February 2, 2026 (since January 31 falls on Saturday)
• Due to IRS: February 2, 2026 (same deadline—no extension for electronic filing)

Form 1099-MISC: Use for payments other than nonemployee compensation:

• Rent payments ($600+)
• Equipment rental without operator ($600+)
• Legal settlements
• Other miscellaneous income
• Due to recipient: February 2, 2026
• Due to IRS (paper): March 2, 2026 (since February 28 falls on Saturday)
• Due to IRS (electronic): March 31, 2026

Most construction contractor payments to subcontractors go on Form 1099-NEC with the earlier February 2nd deadline for IRS filing. This deadline already passed, but if you filed correctly, you're in good shape. If you didn't, we'll address damage control strategies later in this guide.

Payments That Don't Require 1099s

You don't need to issue 1099s for payments to:

C-Corporations and S-Corporations: Most incorporated subcontractors don't require 1099s (exception: attorney fees always require 1099s regardless of incorporation)

Employee payments: If you're treating someone as an employee with W-2 and payroll tax withholding, they get a W-2, not a 1099

Payments under $600: No 1099 required if annual payments to a single contractor stay below $600

Materials-only suppliers: Suppliers who only deliver materials without providing installation or labor services

Credit card or PayPal payments: If you paid via credit card or payment processor, the payment processor issues Form 1099-K to the recipient. You're not required to also issue a 1099-NEC, though some contractors do so for consistency

The C-Corp/S-Corp Exception That Confuses Everyone

Here's where most San Jose contractors get confused: You generally don't need to issue 1099s to incorporated businesses, but how do you know if your subcontractor is incorporated?

The W-9 form tells you. When a subcontractor completes a W-9, they check a box indicating their tax classification:

• Individual/sole proprietor = 1099 required
• Single-member LLC = Usually 1099 required (unless LLC elected S-Corp status)
• Partnership = 1099 required
• C Corporation = 1099 generally not required
• S Corporation = 1099 generally not required

Critical mistake: Assuming a subcontractor with "Inc." or "LLC" in their business name is automatically incorporated for tax purposes. Many LLCs are taxed as sole proprietorships or partnerships and DO require 1099s.

Always rely on the tax classification checked on the W-9 form, not assumptions based on business names.

The W-9 Collection Process: Your First Line of Defense

The single most important thing construction contractors can do to avoid 1099 penalties is collecting W-9 forms BEFORE paying subcontractors. Yet most contractors only think about W-9s in January when scrambling to file 1099s.

When to Collect W-9 Forms

Optimal timing: Before issuing first payment to any new subcontractor

How this works in practice:

1. You hire a new electrical subcontractor for a project
2. Before processing their first invoice, you send them a W-9 request
3. They return the completed W-9
4. You enter their information into your accounting system
5. You process payment with confidence that you have all required tax information

Reality for most contractors:

1. Electrician completes work
2. You process payment immediately to maintain good relationship
3. You "plan to get the W-9 later"
4. January arrives
5. You're desperately trying to track down 15 subcontractors for W-9s
6. Several don't respond
7. You're facing penalties or backup withholding requirements

The difference between these two approaches is thousands of dollars in prevented penalties.

How to Request W-9s from Subcontractors

Use a formal, professional process:

Email template:

"Hi [Subcontractor Name],

Before we can process payment for the [project name] work, we need you to complete IRS Form W-9 for our tax records. This is a standard requirement for all subcontractors and vendors.

You can download the form here: https://www.irs.gov/pub/irs-pdf/fw9.pdf

Please complete all sections, sign the form, and return it to [your email] within 48 hours so we can process your payment.

If you've already provided us with a W-9 this year, please disregard this email.

Thanks,[Your Name][Your Company]"

Important elements:

• Make it clear payment is contingent on receiving W-9
• Provide direct link to official IRS form
• Set clear deadline (48 hours is reasonable)
• Professional but firm tone

What to Do When Subcontractors Don't Respond

Some subcontractors ignore W-9 requests. Here's your escalation process:

Day 0: Send initial W-9 request via email

‍Day 2: Follow up email: "Still need your W-9 to process payment"

‍Day 3: Phone call: "We can't pay you without a W-9. When can you get this to us?"

‍Day 4: Send payment with letter explaining backup withholding

If a subcontractor absolutely refuses to provide a W-9, you have several options:

Option 1: Backup Withholding

• Withhold 24% of all payments
• Remit the withheld amount to IRS using Form 945
• File Form 1099 with "Applied For" in the TIN field

Option 2: Don't Hire Them Again

• Many contractors adopt a policy: "No W-9, no future work"
• This incentivizes compliance

Option 3: Terminate Relationship

• If the subcontractor is being difficult about basic paperwork, what does that say about other aspects of their business?

Most subcontractors comply when they understand it's a requirement, not a request. The few who don't comply are usually dealing with tax problems or working under the table—red flags you should heed.

Organizing W-9 Forms

Create a system for storing W-9 forms:

Digital filing system (recommended):

• Scan all W-9 forms to PDF
• Name files: "W9_[Company Name]_[Year]"
• Store in organized folder: Taxes/W9s/2026/
• Back up to cloud storage

Physical filing system:

• Dedicated file folder or binder for current year W-9s
• Alphabetical organization by company name
• Keep for at least 4 years (IRS statute of limitations, though 7 years is safer)

When tax season arrives, you'll have every W-9 ready instead of hunting through emails, old project files, and text messages.

The February 2nd Deadline: 1099-NEC Filing Requirements

The February 2nd deadline for 1099-NEC forms (moved from January 31st since it falls on Saturday in 2026) is the most critical deadline for construction contractors.

What Was Due February 2nd

Two things had to happen:

1. Furnish Copy B to each subcontractor: They need their copy to file their personal tax return
2. File Copy A with the IRS: The IRS matches this against the subcontractor's tax return

Both deadlines are the same date—no extension for electronic filing like you get with Form 1099-MISC.

If You Missed February 2nd: Damage Control

If you're reading this after February 2nd and haven't filed, you're not alone—but you need to act immediately.

File as soon as possible because the penalty structure rewards quick correction:

• File by March 4th (30 days late): $70 per form penalty
• File March 5 - August 1: $140 per form penalty
• File after August 1 or never: $340 per form penalty
• Intentional disregard: $680 per form with no maximum cap

For a contractor with 20 subcontractors:

• File by March 4: $1,400 penalty
• File by July 31: $2,800 penalty
• File after August 1: $6,800 penalty

That $5,400 difference between filing now versus August is real money that could pay for equipment, materials, or an employee.

How to file late:

1. Gather all subcontractor information immediately
2. Prepare Form 1099-NEC for each qualifying payment
3. File electronically using approved IRS e-file provider (fastest processing)
4. Send Copy B to each subcontractor via certified mail
5. Document everything—filing dates, tracking numbers, confirmation receipts

Don't wait thinking "I've already missed it, what's the difference?" Every day you delay increases your penalty exposure.

Furnishing Copies to Subcontractors

Even if you filed with the IRS, you must furnish copies to subcontractors. Failure to furnish is a separate penalty.

Acceptable delivery methods:

• Mail to address on W-9 (recommended: certified mail for proof of delivery)
• Electronic delivery if recipient consents (requires specific consent, not just email)
• Hand delivery with signed receipt

What to send:

• Copy B (for recipient)
• Copy 2 (for recipient's state return, if applicable)
• Cover letter explaining the form

Sample cover letter:

"Enclosed is your 2025 Form 1099-NEC showing payments we made to you during 2025. You'll need this information to prepare your 2025 tax return.

Please contact us immediately at [phone] if any information is incorrect. We filed the attached information with the IRS, so corrections need to be made promptly.

Thank you for your work on our projects in 2025."

The March 2nd and March 31st Deadlines: 1099-MISC Filing

If you made payments that require Form 1099-MISC (rent, equipment rental, royalties, etc.), you have later deadlines:

March 2, 2026 (Paper Filing)

If you're filing fewer than 10 information returns, you can file on paper. Paper forms must be postmarked by March 2, 2026 (moved from February 28th since it falls on Saturday).

Where to mail: Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301

What to include:

• Form 1096 (Annual Summary and Transmittal)
• All Copy A forms from Form 1099-MISC
• No staples or paperclips (forms must be flat mailed)

Why paper filing is problematic:

• Slow processing (8-12 weeks for IRS to acknowledge receipt)
• No immediate confirmation of receipt
• Higher error rates
• Risk of lost mail

March 31, 2026 (Electronic Filing)

If you're filing 10 or more information returns total (1099s, W-2s, 1098s, etc.), electronic filing is mandatory.

Even if not mandatory, e-filing is strongly recommended:

• Faster processing
• Immediate confirmation
• Lower error rates
• Later deadline (March 31 vs. March 2 for paper)

E-filing options:

• IRS FIRE System (free but complex): https://fire.irs.gov
• Commercial providers ($2-5 per form): Tax1099, Track1099, Tax Bandits
• Through your CPA: Many accounting services include 1099 filing

For most Bay Area construction contractors, paying $50-100 to a commercial e-file provider is worth avoiding the headache of the IRS FIRE system.

Common 1099 Mistakes Construction Contractors Make

After preparing thousands of 1099s for general contractors and builders, we see the same mistakes repeatedly:

Mistake #1: Not Collecting W-9s Upfront

We've covered this, but it bears repeating: collecting W-9s in January instead of throughout the year causes 80% of 1099 problems.

Cost of this mistake:

• Time spent tracking down unresponsive subcontractors
• Potential backup withholding requirements
• Penalties for incorrect or missing TINs
• Delayed filing causing late penalties

Mistake #2: Issuing 1099s to Corporations That Don't Need Them

Contractors waste time and money issuing 1099s to incorporated subcontractors who don't require them.

The issue: You're not penalized for issuing unnecessary 1099s, but you're wasting time and filing fees on forms you didn't need to file.

Solution: Check the W-9 tax classification. If it says "C Corporation" or "S Corporation," you generally don't need to issue a 1099 (except for attorney fees).

Mistake #3: Combining Multiple Payments into One 1099

You hired ABC Electrical for three different projects throughout 2025:

• January: $800
• June: $1,200
• November: $900
• Total: $2,900

You issue ONE Form 1099-NEC showing $2,900. This is correct.

Common mistake: Issuing three separate 1099s (one per project) showing $800, $1,200, and $900.

Why it's wrong: 1099s are annual summaries of all payments to a single recipient, not project-by-project reporting.

Correct approach: Aggregate all payments to each subcontractor for the year and issue one 1099 showing the total.

Mistake #4: Reporting Reimbursed Expenses

You pay a subcontractor $10,000 for their work plus $1,500 reimbursement for materials they purchased on your behalf.

Wrong: Report $11,500 on Form 1099-NEC

Right: Report only $10,000 (the actual compensation). Reimbursed expenses aren't taxable income to the subcontractor if properly documented.

Requirements for excluding reimbursements:

• Subcontractor must provide receipts for reimbursed expenses
• Reimbursement must be for actual documented costs
• Must be typical business expenses (materials, permits, etc.)

If you can't document reimbursements properly, include them in the 1099 amount to be safe.

Mistake #5: Not Reporting Credit Card Payments

Your subcontractor asks you to pay via credit card or PayPal. You assume the payment processor handles all tax reporting, so you don't issue a 1099.

IRS position: While payment processors issue Form 1099-K, the contractor-subcontractor relationship also triggers 1099-NEC requirements. The IRS says you should still issue Form 1099-NEC.

Practical reality: Many contractors don't issue 1099s for credit card payments because the subcontractor will receive Form 1099-K from the processor. The subcontractor is responsible for reconciling any duplicate reporting on their return.

Conservative approach: Issue Form 1099-NEC for all qualifying payments regardless of payment method. Let the subcontractor deal with reconciliation.

Alternative: Include a note in Box 7 of Form 1099-NEC: "Paid via credit card - recipient may receive duplicate 1099-K"

Mistake #6: Incorrect Taxpayer Identification Numbers

You file Form 1099 with an incorrect Social Security Number or EIN for the subcontractor.

What happens:

• IRS computer matching systems flag the discrepancy
• You receive CP2100 or CP2100A notice from IRS
• You face $60-340 penalty per incorrect TIN
• You must request corrected W-9 from subcontractor
• Future payments to this subcontractor require backup withholding until TIN is verified

Prevention: When entering TIN from W-9, double-check against IRS TIN Matching Service before filing 1099s.

IRS TIN Matching (available to businesses): https://www.irs.gov/tax-professionals/taxpayer-identification-number-tin-matching

For a small fee, you can verify TINs before filing, preventing costly penalties.

Mistake #7: Using Subcontractor's Business Name Instead of Legal Name

Your W-9 shows:

• Legal name: John Smith
• Business name: Smith Electrical Services

You issue the 1099 to "Smith Electrical Services"

Problem: IRS matching system looks for "John Smith" (the name associated with the TIN). When they see "Smith Electrical Services," the computer flags a name/TIN mismatch.

Correct approach: Use the exact legal name from the W-9 (John Smith), but include the business name in the address lines for clarity:

Name: John Smith
Address: Smith Electrical Services
123 Main St
San Jose, CA 95110

Mistake #8: Not Filing Corrected 1099s When Errors Are Discovered

You filed Form 1099 in February showing $8,000 paid to a subcontractor. In March, you discover you actually paid $12,000 (missed some payments in your initial calculation).

Wrong response: "I already filed, so I can't do anything now"

Right response: File Form 1099-NEC (Corrected) immediately

How to file corrections:

1. Prepare new Form 1099 with correct information
2. Check the "CORRECTED" box at top of form
3. File with IRS
4. Furnish corrected copy to recipient

Important: File corrections as soon as errors are discovered. The longer you wait, the more likely you face penalties. If you proactively correct before the IRS discovers the error, penalties may be reduced or waived.

Special Situations That Trip Up Construction Contractors

Several unique scenarios create confusion for builders:

Situation #1: The Subcontractor Who Works for Multiple Contractors

You paid XYZ Plumbing $45,000 during 2025. They also worked for 10 other general contractors in the area.

Your responsibility: Report only the $45,000 you paid. You're not responsible for reporting what other contractors paid.

Why this matters: Some subcontractors receive 10+ Forms 1099-NEC from different general contractors, totaling $200,000+ in reported income. This is correct—each contractor reports what they paid.

Situation #2: The Subcontractor Who Became an Employee Mid-Year

January-June: You paid Joe as a subcontractor, $30,000 total
July-December: You hired Joe as employee, paid $35,000 as wages

Correct reporting:

• Issue Form 1099-NEC for $30,000 (January-June payments)
• Issue Form W-2 for $35,000 (July-December wages)

Do not: Combine into single form. These are different types of payments with different tax treatments.

Situation #3: The Family Member Subcontractor

You hired your adult son's LLC to do electrical work. You paid his LLC $25,000 during 2025.

Question: Do you need to issue a 1099 to family?

Answer: Yes, if the arrangement meets standard 1099 requirements:

• Your son's LLC is not incorporated as C-Corp or S-Corp
• Payments exceeded $600
• Services were actually performed for genuine business purposes

Family relationships don't exempt you from 1099 reporting requirements. However, ensure the arrangement is legitimate (actual work performed, reasonable compensation, arm's length transaction) to avoid IRS characterization as a gift or personal expense.

Situation #4: The Subcontractor Paid Partially with Materials

You provided $5,000 in materials to a framing contractor and paid them $8,000 cash for their labor.

Question: What amount goes on the 1099?

Answer: Generally $8,000 (the cash payment). Materials you provided aren't considered additional compensation unless the subcontractor specifically agreed to accept materials as payment in lieu of cash.

Exception: If your contract says "We'll pay $13,000: $8,000 cash plus $5,000 in materials," then report $13,000 because materials are substituting for cash compensation.

Situation #5: The Subcontractor Who Disappears

You need to issue a 1099 to a subcontractor, but they've gone out of business, moved, and you can't locate them.

What to do:

• File Form 1099 with the last known address from your W-9
• Keep documentation of your attempts to contact them
• If USPS returns the mailed copy as undeliverable, keep the returned envelope as proof you attempted to furnish the form

Important: You can't skip filing just because you can't locate the recipient. File with IRS using available information and document your good faith attempt to furnish.

Situation #6: The Disputed Payment

You're in a legal dispute with a subcontractor about final payment. They claim you owe $15,000 more than you paid. The issue is unresolved at year-end.

What to report: Report the amount you actually paid in 2025, regardless of disputed amounts.

Example:

• Contract amount: $50,000
• You paid: $35,000
• Disputed balance: $15,000
• Amount on 1099: $35,000

If you pay the disputed amount in 2026 (after litigation resolves), you report it on 2026's Form 1099-NEC, not retroactively on 2025's form.

Situation #7: The Subcontractor Operating Under the Table

You hired a framing crew for a project. They insist on cash payment, won't provide W-9, seem to be working illegally.

What to do:

• Don't hire them (seriously, the liability risks aren't worth it)
• If you already paid them, you still must report payments on Form 1099
• Without a TIN, report with "Applied For" in the TIN field
• Institute backup withholding on any future payments
• Consult with employment attorney about potential employee misclassification liability

Reality: Working with under-the-table subcontractors exposes you to:

• IRS penalties for failing to backup withhold
• Employee misclassification liability if they're actually employees
• Workers' comp insurance fraud charges
• Liability if they're undocumented workers
• State licensing board violations

It's not worth the risk. Require W-9s and legal work authorization from all subcontractors.

Integrating 1099 Compliance into Your Accounting System

The key to avoiding 1099 problems isn't working harder in January—it's having proper systems throughout the year.

QuickBooks Setup for Construction Contractors

If you use QuickBooks (which most construction businesses do), proper setup makes 1099 filing automatic:

Step 1: Enable 1099 Tracking

For each subcontractor vendor:

1. Go to vendor profile
2. Check "Track payments for 1099"
3. Enter their TIN from W-9
4. Save vendor profile

Step 2: Use Correct Expense Accounts

QuickBooks only tracks 1099 payments made to accounts designated as 1099-eligible. Common 1099-eligible accounts for contractors:

• Subcontractors
• Contract Labor
• Outside Services
• Professional Fees

Ensure all subcontractor payments code to 1099-tracked accounts.

Step 3: Regular Reconciliation

Monthly:

1. Run "Prepare 1099s" wizard in QuickBooks (under Vendors menu)
2. Review which vendors are flagged for 1099s
3. Verify amounts look reasonable
4. Confirm you have W-9s for everyone on the list

This monthly check catches problems before year-end:

• Vendors incorrectly flagged for 1099s
• Missing W-9 forms
• Incorrect expense account coding
• Payments that shouldn't be included

Step 4: Year-End 1099 Preparation

In January:

1. Run final "Prepare 1099s" report
2. Verify all information matches W-9 forms
3. Review for any last-minute corrections
4. E-file directly from QuickBooks (requires subscription) or export to e-file provider

Creating a W-9 Collection System

System components:

New vendor intake process:

1. Subcontractor submits first invoice
2. Admin sends automated W-9 request email
3. W-9 received and scanned to vendor file
4. TIN verified using IRS TIN Matching (optional but recommended)
5. Vendor entered into accounting system with 1099 tracking enabled
6. Invoice approved for payment

No W-9 = No payment. Make this policy absolute and communicate it clearly to all subcontractors.

Annual W-9 renewal:

Once per year (suggested: December), send W-9 update requests to all subcontractors:

"Hi [Name],

As part of our annual tax compliance process, we need updated W-9 forms from all contractors and vendors.

Even if nothing has changed since last year, please complete and return the attached W-9 form by [date].

Thanks for your cooperation."

This catches:

• Name changes (marriage, business restructuring)
• Address changes
• Business structure changes (LLC converting to S-Corp, etc.)
• New EINs

Job Costing and 1099 Tracking

Many construction contractors use job costing software to track project profitability. Ensure your job costing integrates with 1099 compliance:

Example workflow:

1. Electrician completes work on Project A
2. You enter their invoice into job costing: $5,000 charged to Project A, Electrical subcategory
3. Job costing software feeds to accounting system
4. Accounting system records $5,000 expense in "Subcontractors" account (1099-tracked)
5. Payment is made and automatically tracked for year-end 1099 reporting

Common problem: Job costing tracks subcontractor costs by project, but doesn't aggregate across all projects for individual subcontractors. You need to know that ABC Electrical worked on Project A ($5,000), Project D ($3,500), and Project G ($8,000) for total annual payments of $16,500.

Your accounting and bookkeeping system should easily generate this vendor-level summary.

State-Specific Requirements: California's 1099 Rules

California has additional reporting requirements beyond federal forms:

California Form 1099 Reporting

You must file copies of 1099-NEC and 1099-MISC with California Franchise Tax Board if:

• The service provider is a California resident, OR
• Services were performed in California, OR
• You have a California address

Critical difference from federal: California requires reporting regardless of amount. Even if you paid a contractor $300 (below the $600 federal threshold), you still report to California if one of the above criteria applies.

Where to file:

• Federal: IRS Service Center
• California: Franchise Tax Board

Most e-file providers handle both federal and California filing simultaneously. If filing paper, you need separate mailings to IRS and FTB.

Penalties: California has separate penalty structure from federal, so you can face both federal AND California penalties for the same missing form.

California Form 592-B for Nonresident Contractors

If you pay a nonresident contractor (someone who lives outside California) for services performed in California, you must:

1. Withhold 7% of payment for California income tax
2. Remit withheld amount to FTB using Form 592
3. Provide Form 592-B to contractor showing withholding

Exception: No withholding required if annual payments to that contractor are under $1,500

This requirement surprises many Bay Area contractors. If you hired an out-of-state contractor to work on a San Jose project, you should have withheld 7% for California.

Example:

• Out-of-state HVAC contractor works on your project
• You pay them $20,000
• You should have withheld $1,400 (7%) for California
• Remit $1,400 to FTB, pay contractor $18,600

Failing to withhold makes you personally liable for the tax that should have been withheld. Many contractors discover this requirement only when FTB sends a bill.

California Wage Theft Law and Construction

California's wage theft laws have specific provisions affecting construction contractors and subcontractors. While not directly related to 1099s, misclassification issues can lead to serious penalties.

Key points:

• California has strict employee classification rules (ABC test under AB5)
• Misclassifying employees as independent contractors can result in criminal penalties
• Labor Commissioner increasingly audits construction industry for misclassification

If your subcontractors look more like employees (you control their schedule, provide all tools, direct their work closely), you might be misclassifying employees as contractors. This is bigger than 1099 issues—it's potential criminal exposure.

Consult with an attorney specializing in construction employment law if you're uncertain about classification.

When the IRS Comes Knocking: Handling 1099 Notices

Despite your best efforts, you might receive an IRS notice about 1099s. Here's how to handle common notices:

CP2100/CP2100A: Name/TIN Mismatch

What it means: The name and TIN you reported on Form 1099 don't match IRS records

Why it happens:

• Typo in entering TIN from W-9
• Subcontractor provided incorrect TIN
• Subcontractor's name changed (marriage, divorce) but they didn't update with Social Security Administration
• Business restructured (LLC became S-Corp) but TIN wasn't updated

What to do:

1. Contact subcontractor immediately
2. Request new W-9 with corrected information
3. Verify TIN using IRS TIN Matching Service
4. If TIN is correct but name doesn't match, subcontractor needs to update their records with SSA
5. Begin backup withholding (24%) on future payments until mismatch is resolved
6. File Form 945 quarterly to remit backup withheld amounts

Penalty: If you don't begin backup withholding after receiving notice, you become liable for the taxes that should have been withheld

CP2000: Underreported Income

What it means: IRS computers matched 1099s to a taxpayer's return and found unreported income

Your involvement: If you correctly reported payments on Form 1099, this is the subcontractor's problem, not yours. However, they might contact you claiming your 1099 was wrong.

How to respond:

1. Pull your records showing actual payments
2. Provide documentation to subcontractor (if requested)
3. If you made an error, file corrected Form 1099 immediately
4. If your records are accurate, politely explain you reported payments correctly and it's their responsibility to report on their return

Letter 226-J: Backup Withholding Requirement

What it means: IRS is informing you that you must begin backup withholding on payments to a specific payee

Trigger: Payee failed to provide TIN or provided incorrect TIN

What to do:

1. Begin withholding 24% on all payments to that payee
2. Provide Form 945 quarterly to IRS with withheld amounts
3. Continue withholding until IRS notifies you to stop
4. Consider whether to continue working with subcontractor who can't/won't provide correct TIN

Letter 972CG: Information Return Penalty

What it means: IRS is assessing penalty for late, incorrect, or missing 1099s

Amount: Varies based on how late and how many forms

What to do:

1. Review the penalty calculation
2. If accurate, pay the penalty
3. If you have reasonable cause for late filing, submit written explanation requesting penalty abatement
4. Implement systems to prevent future occurrences

Reasonable cause examples:

• Death or serious illness of person responsible for filing
• Natural disaster that destroyed records or prevented filing
• Fire or casualty that destroyed records
• Unavoidable postal service delay

Not reasonable cause:

• "I forgot"
• "I was too busy"
• "I didn't know the deadline"
• "My accountant didn't remind me"

The IRS grants reasonable cause relief only in genuinely unavoidable situations.

The Real Cost of Non-Compliance: Beyond Just Penalties

Direct IRS penalties are only part of the cost of poor 1099 compliance. Consider the full impact:

Lost Time and Productivity

Hours spent in January desperately tracking down W-9 forms could have been spent:

• Bidding new projects
• Managing active jobs
• Building client relationships
• Planning business growth

Many contractors spend 20-40 hours dealing with year-end 1099 chaos that could have been prevented with proper systems.

Damaged Subcontractor Relationships

Scrambling to get W-9s in January sends the message that you're disorganized and reactive. Subcontractors notice.

The contractors who are most professional about 1099 compliance are the ones subcontractors want to work for. Good subcontractors have options—they choose to work with general contractors who have their act together.

Increased Audit Risk

While late or missing 1099s alone don't trigger audits, they contribute to an overall picture of poor record-keeping that can increase audit risk if you're selected for other reasons.

If your business is audited and the auditor sees missing 1099s, expect scrutiny of all expense deductions. The auditor will wonder: "If they can't get 1099s right, what else is wrong?"

Personal Liability for Backup Withholding

If you fail to backup withhold when required, you become personally liable for the taxes that should have been withheld—even if you're incorporated or an LLC.

This is a rare instance where the corporate veil doesn't protect you. The IRS can come after you personally for unwithheld backup withholding taxes.

State Licensing Board Issues

In California, serious or repeated tax compliance problems can be reported to the Contractors State License Board. While rare, CSLB can suspend or revoke contractor licenses for significant tax violations.

Don't let 1099 non-compliance become a licensing issue.

Professional Help: When to Outsource 1099 Compliance

Many San Jose construction contractors benefit from outsourcing 1099 preparation and filing to professional accounting services.

DIY vs. Professional: The Real Cost Comparison

DIY Approach Costs:

• Your time: 20-40 hours × your hourly rate
• E-file software: $50-200
• Postage/mailing: $50-100 if paper filing
• Penalties if mistakes occur: $60-680 per form
• Stress and frustration: priceless

Professional Service Costs:

• 1099 preparation and filing: $200-500 depending on volume
• Year-round vendor management and W-9 collection: Included in monthly bookkeeping ($200-400/month)
• Penalty protection: Mistakes are the professional's responsibility
• Time saved: 20-40 hours returned to your schedule

For most contractors, professional services pay for themselves in time savings alone, before considering penalty prevention.

What Good 1099 Service Includes

Comprehensive 1099 service should provide:

Year-round support:

• W-9 collection during vendor onboarding
• Quarterly review of 1099-eligible payments
• TIN verification before year-end
• Vendor file maintenance

Year-end preparation:

• Reconciliation of all payments
• 1099 form preparation
• Electronic filing with IRS and California FTB
• Furnishing copies to all recipients
• Form 1096 and transmittal documentation

Post-filing support:

• Response to IRS notices
• Corrected form preparation if needed
• Backup withholding implementation if required
• Penalty abatement requests if applicable

The Asnani CPA Approach for Construction Contractors

At Asnani CPA, we specialize in construction contractor accounting throughout the Bay Area. Our 1099 compliance service includes:

Proactive W-9 management: We request W-9s from all new vendors when they're added to your system, not in January when it's too late

Monthly monitoring: We track contractor payments monthly, flagging anyone approaching $600 thresholds well before year-end

TIN verification: We verify taxpayer identification numbers before filing to prevent costly mismatches

Integrated bookkeeping: Our bookkeeping services properly categorize all contractor payments throughout the year, making 1099 preparation a simple report generation instead of a detective mission

Timely filing: We prepare and file all 1099 forms in January, giving weeks of buffer before the February deadline

California compliance: We handle both federal and California reporting, ensuring you're compliant at all levels

Audit support: If you receive IRS notices about 1099s, we handle all correspondence and resolution

Our clients in San Jose, Fremont, Milpitas, Sunnyvale, Santa Clara, and throughout the Bay Area never worry about 1099 penalties—we handle everything.

Your 1099 Compliance Checklist for 2026

Use this checklist to ensure you're handling 1099s correctly going forward:

Immediately (This Week):

• Review whether you missed the February 2nd 1099-NEC deadline
• If you missed it, gather information and file immediately to minimize penalties
• Verify you furnished copies to all subcontractors
• Check if you have any 1099-MISC forms due by March 2nd (paper) or March 31st (e-file)

Before Next Payment to Any Subcontractor:

• Verify you have current W-9 on file
• If missing, request W-9 before processing payment
• Enter subcontractor into accounting system with 1099 tracking enabled

Monthly (Starting Now):

• Run 1099 preview report in accounting software
• Verify all subcontractors who should be tracked are being tracked
• Identify anyone approaching $600 threshold
• Request W-9s from any new vendors added this month

Quarterly:

• Review total payments to each subcontractor
• Verify expense account coding is correct
• Update vendor files with any address or tax classification changes
• Run TIN verification on high-dollar subcontractors

December 2026:

• Send W-9 update requests to all subcontractors
• Review preliminary 1099 list for accuracy
• Identify and resolve any missing or incorrect information
• Schedule 1099 preparation for January

January 2027:

• Generate final 1099 forms
• Review all forms for accuracy
• E-file with IRS and California FTB
• Mail copies to all recipients by January 31st

Don't Let 1099 Compliance Derail Your Construction Business

The February 2nd deadline has passed, but the March deadlines are approaching. If you haven't handled your 1099 compliance correctly, you still have time to minimize penalties—but you must act now.

More importantly, you need to establish systems that prevent 1099 problems in future years. The contractors who never face these issues aren't lucky—they have proper accounting systems, professional support, and proactive processes.

If you're a San Jose Bay Area construction contractor tired of 1099 stress, scrambling for W-9s every January, and worrying about penalties, schedule a consultation with Asnani CPA. We'll review your current situation, address any immediate compliance issues, and implement systems to prevent future problems.

Our clients in Oakland, San Francisco, Palo Alto, Mountain View, Campbell, Cupertino, Menlo Park, Redwood City, and San Mateo sleep soundly knowing their 1099 compliance is handled properly, year-round.

Don't wait until next January to address this. The time to fix your 1099 process is right now.

Frequently Asked Questions

Do I need to issue a 1099 to a handyman I paid $700 for one small job?

Yes, if they're operating as an individual or unincorporated business. The $600 threshold applies to annual total payments, so a single $700 payment triggers the requirement. Collect their W-9 and issue Form 1099-NEC. If they're incorporated as C-Corp or S-Corp, you don't need to issue a 1099.

What if my subcontractor says "I don't need a 1099 because I'm an LLC"?

Being an LLC doesn't automatically exempt them from receiving 1099s. Many LLCs are taxed as sole proprietorships or partnerships and DO require 1099s. Check their W-9—the tax classification section tells you whether they need a 1099. If they're LLC taxed as S-Corp or C-Corp, they're exempt (usually). If they're single-member LLC (disregarded entity) or partnership, they require 1099s.

Can I avoid 1099s by paying subcontractors with my business credit card?

No. Your method of payment doesn't eliminate 1099 requirements. While the payment processor will issue Form 1099-K to the recipient for credit card transactions, you should still issue Form 1099-NEC for contractor services. The recipient reconciles any duplicate reporting on their tax return. Don't use payment method as a way to avoid 1099 compliance.

What happens if I file a 1099 with wrong information and the subcontractor gets audited?

If you reported incorrect information, file a corrected Form 1099 immediately. Provide the corrected form to both the IRS and the subcontractor. If the error was in the subcontractor's favor (you underreported income), you might face penalties. If the error was against them (you overreported), the correction helps them with their audit. Always correct errors promptly when discovered—waiting makes things worse.

How long do I need to keep W-9 forms and 1099 records?

Keep W-9 forms and all 1099-related documentation for at least 4 years after the filing date (the IRS's standard statute of limitations). However, 7 years is safer and aligns with general business record retention recommendations. Store them securely—you'll need them if the IRS questions your filings or if you face an audit.

What if I legitimately can't get a W-9 from a subcontractor I've already paid?

File Form 1099 with the information you have, putting "Applied For" in the TIN field. Keep documentation of all your attempts to obtain the W-9 (emails, letters, certified mail receipts). This demonstrates good faith effort. However, you must begin backup withholding (24%) on any future payments to this subcontractor until they provide a valid W-9. The backup withholding requirement makes most subcontractors suddenly find time to complete their W-9.

About Asnani CPA: We're a San Francisco Bay Area CPA firm specializing in construction contractor accounting, including job costing, 1099 compliance, payroll, tax planning, and comprehensive bookkeeping services. We help general contractors, specialty contractors, and builders throughout the Bay Area maintain compliance, minimize taxes, and improve profitability. Contact us for a complimentary construction business accounting assessment.

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