1099-NEC Higher Than What You Kept: Subcontractors on Schedule C

Do I report the full 1099-NEC amount or only what I took home?

If you file Schedule C, report the full amount your client paid you on line 1, even if you passed most of it to a crew or subcontractors. Then deduct what you paid them on the lines where those costs belong. The result, net profit on line 31, is what you kept, and it is what income tax and self-employment tax are figured on. The Schedule C instructions say line 1 must include the amounts properly shown on your Forms 1099-NEC. A partnership reports the same gross on Form 1065, line 1a (Form 1065 instructions).

A case stops being simple when:

• earlier returns showed only the net, so line 1 was lower than the forms your clients filed;
• no Form 1099-NEC went to the subcontractors, or some of them were paid in cash;
• some of the crew work the way employees do;
• the form includes money that repaid your costs or belongs to someone else; or
• the business has more than one owner, a spouse included, or is an LLC taxed as a corporation, so it may not belong on your own Schedule C.

Gross reporting still applies to your own job receipts in each of these; money that belongs to someone else, or a business that is not a sole proprietorship, changes what goes on your Schedule C. Sorting out earlier years, missing forms or worker status takes a review of your returns, payment records and forms together, which is where a tax professional helps.

Gather:

• the client contracts and every Form 1099-NEC you received;
• each payment to each subcontractor, with its date, amount and job, plus their invoices and Forms W-9;
• your materials receipts.

Why does the IRS expect the gross on Schedule C line 1?

Schedule C starts with everything the business took in, then subtracts costs, and the IRS compares line 1 with what clients report. Line 1 is for gross receipts from your trade or business, and the instructions say to report all business income from all sources, whether or not a form arrives.

Three things make the net the wrong starting point:

• The form shows the payment, not where it went. The 1099-NEC instructions tell payers to report payment for services in box 1a, including parts and materials when supplying them was incidental to the service. A form for the full job is not wrong because you kept little of it.
• The IRS uses the form to check your return. The same instructions say the IRS uses the information in the boxes to determine whether the recipient properly reported the payment.
• Income you direct to someone else is still yours. Publication 334 says all income you earn is taxable to you and you cannot avoid tax by having it paid to a third party; its example is rent paid to your son. Passing your earnings on to a crew does not take them out of gross receipts; the payment becomes a cost you deduct if it qualifies. Whether money a client paid straight to another person was your earnings or that person's own depends on the facts; see the nominee section below.

Are my gross receipts the full customer payment when labor and materials cost most of it?

Generally yes: gross receipts are the whole amount the customer paid for the job. Paying a crew or buying materials is not a refund or price cut to the customer, so those costs come off later as deductions (Publication 334). The painter example below shows the numbers.

Where do I deduct what I paid my crew or subcontractors?

Pay to subcontractors who are not your employees goes on line 11, contract labor. Pay to employees goes on line 26, wages. Line numbers below follow the latest published Schedule C and its instructions; check them against the form for your year.

Deduct each payment once. The line 11 instructions tell you to leave out contract labor deducted elsewhere, such as on line 17, 21, 26 or 37.

A service business such as a painter or carpenter usually has no cost of goods sold. Publication 334 says that chapter does not apply to a personal service business unless it also sells or charges for the materials it normally uses. For job costs shown above gross profit, see cost of goods sold for a service business.

Which of my payees need their own Form 1099-NEC, and by when?

A payee generally needs a Form 1099-NEC if you paid that person at least $2,000 for services in your business during the year. For earlier years the threshold was $600; from payments made in 2027 the amount is adjusted for inflation. The forms for this tax year's payments are due to the payee and the IRS by February 1, 2027 (Form 1099-NEC instructions).

Add up what you paid each person across all jobs in the year, including parts and materials that were incidental to a service. Wages to employees go on Form W-2, and payments to a corporation generally do not need a Form 1099-NEC, with attorneys the exception. Payments by credit card or debit card, and certain payments through third-party payment networks, are reported by the payment company on Form 1099-K instead; checks and cash are not in that carve-out, so they count. Payments to foreign persons may be reported on Form 1042-S instead (General Instructions); see paying contractors abroad.

If you withheld federal income tax under backup withholding, file a Form 1099-NEC for that payee at any amount (General Instructions). A payee who gives you no taxpayer ID number can trigger the withholding, and a payer who does not withhold when required may owe the uncollected tax.

The return asks about this. Schedule C line I asks whether you made payments that required Forms 1099, and line J asks whether you filed or will file them.

Which contractors get a 1099-NEC owns the rules for who, how much, when and whether your state wants a copy. A subcontractor who will not give a Form W-9 is covered in collecting tax IDs from contractors. Forms never sent, and the penalty for them, are covered in late contractor and employee tax forms.

What if some of the people I paid are really my employees?

Pay to a worker who is an employee under the IRS rules generally belongs on line 26 as wages, with payroll withholding and employer taxes, not on line 11 as contract labor. The line 1 amount does not change; the deduction moves and employment tax may be owed on it.

The IRS looks at the whole relationship (IRS: independent contractor or employee):

• Behavioral: whether you control or have the right to control what the worker does and how.
• Financial: how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies.
• Relationship: whether there are written contracts or employee-type benefits, whether the work continues, and whether it is a key part of your business.

No one factor decides it. A business that treats an employee as a contractor with no reasonable basis may be liable for employment taxes for that worker, and Publication 334 adds a penalty. Section 530 relief can protect a business that had a reasonable basis, filed Forms 1099 consistently and treated no similar worker as an employee; it continues for later years while those conditions hold, and reporting the workers on Form W-2 ends it (IRS: section 530 relief).

A sole proprietor owes employment tax personally as the employer (sections 3111 and 3403). A single-member LLC is its own employer for employment tax, but an owner who controlled the payments can owe the trust fund part personally under section 6672 if the failure was willful (Regulations section 301.7701-2; IRS: trust fund recovery penalty).

Contractors who may be employees covers the test, section 530 relief, who can owe the tax personally with the time limits, and how to fix past filings.

The 1099-NEC is bigger than what my client paid me: what do I do?

Some causes, listed below, mean the form is right. If it is wrong, ask the payer for a corrected form (Publication 17). If the payer will not correct a form you believe is wrong, the Schedule C instructions require a statement explaining the difference when the amounts in the nonemployee compensation box (box 1 on older forms, box 1a on the newest) total more than line 1. Keep the proof that the form is wrong, and have a tax professional review the position before you file, because the return will not match what the IRS received.

A return that is lower than a client's form can bring a matching notice. See responding to an IRS underreporter notice.

What if the 1099-NEC includes money that only reimbursed my materials or fuel?

A form that includes costs your client repaid is not necessarily wrong. The 1099-NEC instructions put parts and materials furnished as part of a service in box 1a, and also travel reimbursement you did not account for to the payer. Report the form's amount on line 1 and deduct each cost on the line where it belongs.

Keep the supplier invoices that show what you bought. If your client repaid costs you accounted for and the form still counts them, see 1099-NEC that includes reimbursed expenses.

What if part of the 1099-NEC really belongs to someone else?

Generally, if you receive a Form 1099 for amounts that actually belong to another person, you are a nominee recipient. You file a Form 1099 of the same type for each other owner, showing that person's share, and give each one a copy. List yourself as payer and the other owner as recipient. Form 1096 goes with paper filing only; a filer of 10 or more information returns in the year must e-file instead (General Instructions, nominee returns). A spouse is not required to file a nominee return for amounts owned by the other spouse. The nominee, not the original payer, files these forms.

On Schedule C, line 1 may then be lower than the form's total if you attach a statement explaining the difference (Schedule C instructions).

The nominee rule is not a way to net out a crew. Money you pay your own helpers for work on your job was yours first, so it stays on line 1 and the pay is a deduction. The IRS instructions do not define when money actually belongs to someone else, so the answer depends on the facts. Keep the contract and messages that show whose money it was and who the client owed. A form from a payment app or card processor has its own guide: a payment app form for someone else's sales.

How is self-employment tax figured on what I kept?

Self-employment tax is figured on net profit, not on line 1. Net profit from Schedule C, line 31, goes to Schedule SE, line 2 (Schedule C instructions). Schedule SE applies 92.35% to that net profit to get the amount subject to the tax (Topic 554).

The rate is 15.3%: 12.4% for Social Security, which stops at a yearly wage base, and 2.9% for Medicare. You generally owe it when net earnings from self-employment reach $400 or more. Half of the tax is deductible in figuring adjusted gross income (Topic 554). Wages from another job count toward the same Social Security wage base, and Additional Medicare Tax can apply on higher combined earnings (Schedule SE; Topic 554).

The crew's pay lowers your tax only if it is deducted on the return and you can support it.

Does this change for a multi-member LLC or partnership?

A multi-member LLC taxed as a partnership files Form 1065, not Schedule C. The Schedule C form says partnerships must generally file Form 1065, and the recipient instructions on Form 1099-NEC send a partnership's nonemployee compensation to Form 1065 and the partners' Schedules K-1. See how partnerships are taxed.

Spouses may be an exception. If you and your spouse wholly own the business as community property, you can treat it as a sole proprietorship. If you own it together outside an LLC, you can elect to be a qualified joint venture and each file a Schedule C; that needs both of you to materially participate, no other owners and a joint return, and an LLC does not qualify. Each spouse then reports a share on a separate Schedule C, so line 1 can be lower than a form issued to one of you, which calls for the attached statement (Schedule C instructions). Otherwise co-owners are partners. See spouse and family LLCs.

The owner of a single-member LLC that is disregarded for tax uses Schedule C, unless the LLC elected to be taxed as a corporation (Form 8832), in which case it files its own corporate return (Schedule C instructions).

What records prove the pass-through if the IRS asks?

Records that tie each client payment to what you paid out. Your books must show gross income, deductions and credits, and your supporting documents should show the amount paid and that it was for a business expense (Publication 583).

Cash payouts need their own proof; see paying subcontractors in cash. For how long to keep these records, see how long to keep business records.

Example

These examples are illustrative; all amounts are in US dollars. Assume payments in 2026 to US individuals by check or bank transfer, no backup withholding, and owners with no other wages or self-employment income.

A painter with a crew

The client's Form 1099-NEC shows US$80,000. The painter paid a crew of contractors US$50,000 and bought US$10,000 of paint.

• Line 1, gross receipts: US$80,000.
• Line 11, contract labor: US$50,000.
• Line 22, supplies: US$10,000.
• Net profit before other costs: US$20,000, which is what he kept.

He deducts the paint as supplies; a painter who also sells or charges for the paint may fall under cost of goods sold instead, as explained above.

Self-employment tax is figured on that US$20,000: US$20,000 × 92.35% × 15.3%, about US$2,800, before other costs and deductions. If he reported only US$20,000 on line 1, it would be US$60,000 below the form, and his return would not match what the client reported. Each crew member paid at least the threshold for the year gets a Form 1099-NEC.

An agency lead and five freelancers

A client paid an agency lead US$30,000 for a project. She paid five freelancers US$22,000 in total: US$6,000, US$6,000, US$5,000, US$4,000 and US$1,000, which was all each of them was paid by her that year.

She reports US$30,000 on line 1 and US$22,000 as contract labor, leaving US$8,000 of net profit before other costs. The first four were each paid more than the threshold, so she files and sends each of them a Form 1099-NEC. The freelancer paid US$1,000 was below the 2026 threshold, so no form is needed for that payment. For payments made before 2026 the threshold was US$600, and that freelancer would also have needed one.

A photographer and a form that includes someone else's money

A client's Form 1099-NEC to a photographer shows US$12,000. Suppose US$3,000 of it was owed by the client to a second photographer, and the client asked her to pass it on.

If the US$3,000 really belonged to the second photographer, which is a question of facts, she would be a nominee for that part. She would report US$9,000 on line 1, attach a statement explaining the US$3,000 difference, and file a Form 1099-NEC to the second photographer for US$3,000. If instead she hired the second photographer to help on her own job, the whole US$12,000 is hers and the US$3,000 is contract labor on line 11. Either way the second photographer reached the threshold, so she sends that photographer a Form 1099-NEC for US$3,000.

Different for you?

• Your past returns reported only what you kept: line 1 was lower than the forms your clients filed, and a notice may follow. See amending for income left off past returns and responding to an underreporter notice, and get individual tax help for the filed years and bookkeeping help to rebuild what each client paid and what went to each subcontractor.
• You cannot match each client payment to what you paid out: business and personal money run through one account, or there is no list of who was paid what and for which job. See the records section above, and get bookkeeping help to rebuild a payment record job by job.
• You never filed some years: see Schedule C expenses for unfiled years and get individual tax help.
• No Forms 1099-NEC went to your subcontractors, a subcontractor never gave you a tax ID, or some were paid in cash: see late contractor and employee tax forms, collecting tax IDs from contractors and paying subcontractors in cash, and get bookkeeping help to rebuild a payment record for each subcontractor.
• Your crew looks like employees: see contractors who may be employees before choosing where to deduct their pay, and get individual tax help if past returns already deducted it as contract labor.
• Your 1099-NEC includes reimbursements, the same payment appears on a 1099-K, or a client's form is wrong, duplicated or in the wrong year: see reimbursed expenses on a contractor form and the same income on two tax forms. If the payer will not correct a wrong form, get individual tax help before you file a return that differs from it.
• You own the business with someone else, a spouse included: see spouse and family LLCs, whether a multi-member LLC needs a CPA and corporate and partnership tax help.