# How to track payments to contractors

A plain guide to tracking what you pay contractors, so you know who needs a Form 1099-NEC in January and you can prove each business expense.

Published October 27, 2026.

A contractor is a person or business you pay for work, who is not your employee. Freelancers, designers and developers are common examples.

When you pay contractors, you must [keep records](https://rightobooks.com/blog/how-long-to-keep-business-records/). These records prove your business expense. They also tell you who needs a tax form from you in January.

## The short version

- Get a [Form W-9](https://rightobooks.com/blog/form-w-9-explained/) from each contractor before the first payment.
- Record each payment under the contractor's legal name, with the date, the amount and how you paid.
- Keep the invoice with each payment.
- For payments made in 2026, file a Form [1099-NEC](https://rightobooks.com/blog/form-1099-nec-2026/) for each contractor you paid **$2,000 or more** ([IRS](https://www.irs.gov/businesses/small-businesses-self-employed/am-i-required-to-file-a-form-1099-or-other-information-return)).
- Card and payment app payments do not count toward that $2,000. The payment company reports them on Form [1099-K](https://rightobooks.com/blog/form-1099-k-explained/) ([IRS](https://www.irs.gov/instructions/i1099mec)).

## Words to know

- **Form 1099-NEC**: the form you send to a contractor and the IRS to report what you paid them.
- **Form 1099-K**: a form that card companies and payment apps file for payments that go through them.
- **Payment method**: how you paid: bank transfer, check, cash, card or payment app.

## Why the records matter

Your records do three jobs.

1. **They prove the expense.** Keep documents that show the amount you paid and that it was for your business ([Publication 583](https://www.irs.gov/publications/p583)).
2. **They show who needs a 1099.** You only know who went over $2,000 if you total each contractor's payments.
3. **They protect you.** If a contractor will not give you a tax ID number, you may have to hold back 24% of each payment ([IRS](https://www.irs.gov/businesses/small-businesses-self-employed/backup-withholding)). A W-9 at the start avoids this.

## What to keep for each contractor

- The W-9.
- The agreement or a short note of what the job is.
- Each invoice.
- Proof of payment, such as a bank or card statement. A statement can prove payment if it shows the amount, the payee and the date. Keep the invoice too, because proof of payment alone does not prove the expense ([Publication 583](https://www.irs.gov/publications/p583)).

## Set it up once

- Use **one name for each contractor**, the name on line 1 of their W-9. Two names for one person give you two part totals in January.
- Use **one category** for contract labor.
- Pay contractors from **business accounts only**. This keeps all proof in one place. See [separate business and personal finances](https://rightobooks.com/blog/separate-business-and-personal-finances/).
- Keep **each account and card as its own account** in your books. Then each payment shows how you paid.

## An example

Lena runs a small marketing studio. (She is an example, not a real person.) In 2026 she pays three contractors:

| Contractor | Bank transfer | Business card | Total paid |
|---|---|---|---|
| Omar | $4,500 | $0 | $4,500 |
| Bea | $1,200 | $2,600 | $3,800 |
| Kai | $1,500 | $0 | $1,500 |

Her expense is the full $9,800. How she paid does not change the cost.

Her 1099-NEC list is shorter. Omar got $4,500 by bank transfer, so he gets a form. Bea got only $1,200 by bank transfer. The card company reports the $2,600, so Bea does not get a 1099-NEC from Lena. Kai got $1,500, which is less than $2,000, so he gets no form.

If Lena had looked only at totals, she would have sent Bea a form she did not need.

## The January check

Forms 1099-NEC for 2026 are due by January 31. In 2027 that is a Sunday, so the due date is Monday, February 1, 2027 ([IRS](https://www.irs.gov/instructions/i1099mec)).

1. Finish December. Import and sort the last statements.
2. Run a payment report by contractor for January 1 to December 31.
3. Take out card and payment app payments.
4. Take out corporations, but keep lawyers. Lawyers get a 1099 even when they are a corporation.
5. Apply the $2,000 test to what is left.
6. File and send the forms.

## A Righto tip

[Righto](https://rightobooks.com/) imports your bank and card statements (CSV, OFX or PDF). Each payment shows the account it came from, so you can see how you paid. The contractor payment report gives each contractor's total for the year. You can also ask your own AI agent, such as Claude Code, to split each contractor's payments by account. See [how agents work with Righto](https://rightobooks.com/agents/).

## Common questions

**Do I track contractors I pay less than $2,000?**
Yes. The payments are still a business expense, and you need records for them.

**What if I paid a contractor in cash?**
Cash counts toward the $2,000, like checks and transfers. Get a signed receipt, because there is no bank record.

**Should I track payments to corporations?**
Yes, for your expense records. Most corporations do not get a 1099-NEC, but lawyers do.

## What to do now

1. List everyone you paid for services this year.
2. Ask for any missing W-9.
3. Make sure each contractor has one name in your books.
4. Run a payment report so far this year and split it by payment method.

[Righto](https://rightobooks.com/download/) is free, easy to use and needs no account.

## Sources

- [Am I required to file a Form 1099 or other information return?](https://www.irs.gov/businesses/small-businesses-self-employed/am-i-required-to-file-a-form-1099-or-other-information-return), IRS
- [Instructions for Forms 1099-MISC and 1099-NEC](https://www.irs.gov/instructions/i1099mec), IRS
- [Publication 583, Starting a Business and Keeping Records](https://www.irs.gov/publications/p583), IRS
- [Backup withholding](https://www.irs.gov/businesses/small-businesses-self-employed/backup-withholding), IRS