1099 Season Prep: How to Track Contractor Payments All Year in QuickBooks
Every January, business owners across the US scramble to piece together contractor payment records for 1099-NEC filing. It doesn’t have to be that way. Here’s how to set up year-round tracking in QuickBooks Online so January is boring instead of terrifying.
The January panic is optional
If you’ve ever spent the first two weeks of January digging through bank statements, chasing down W-9 forms, and trying to remember whether that $2,400 payment to your web developer went through PayPal or ACH — you already know why 1099 season is stressful.
The IRS deadline is January 31. That gives you roughly 30 days after year-end to collect every contractor’s tax ID, verify their payment totals, sort out which payments count and which don’t, and file the forms. For a business that pays even five or six contractors, that’s a lot of moving pieces in a tight window.
But here’s the thing: almost all of that work can happen throughout the year, quietly, in the background. QuickBooks Online has the tools to track 1099 payments automatically. You just have to set them up properly. This guide walks through the whole process — from initial setup to monthly maintenance to the actual filing.
Who actually needs a 1099-NEC
Before you can track contractor payments, you need to know which payments qualify. The rules aren’t complicated, but they trip people up every year.
The basic 1099-NEC rule
You must file a 1099-NEC for any person or non-corporate entity you paid $600 or more during the calendar year for services performed in the course of your trade or business. That $600 is cumulative — it’s the total for the year, not per payment.
The form replaced the old Box 7 on 1099-MISC starting in 2020. If you see old guides referencing 1099-MISC for contractor payments, they’re outdated. Non-employee compensation goes on 1099-NEC now.
You DO file a 1099-NEC for:
Freelancers and independent contractors. Sole proprietors. Partnerships. Single-member LLCs (unless they elected S-corp or C-corp status). Attorneys and law firms — regardless of their corporate structure. This is a specific exception: legal fees always get a 1099-NEC.
You do NOT file a 1099-NEC for:
C-corporations. S-corporations (except attorneys). W-2 employees. Payments for merchandise or goods (only services count). Payments made through credit card or third-party payment processors like PayPal — those are reported on 1099-K by the processor, not by you.
The gray areas
Rent payments to individuals go on 1099-MISC, not 1099-NEC. Royalties go on 1099-MISC too. If you paid a contractor partly by check and partly through PayPal, you only report the check portion on 1099-NEC. When in doubt about entity type, that’s what the W-9 tells you — it specifies the federal tax classification.
The mistakes that create January chaos
Most 1099 stress doesn’t come from the filing itself. It comes from not having clean data when it’s time to file. Here are the problems I see over and over.
Problem #1: No W-9 on file
You paid a contractor $4,000 over the course of the year. Now it’s January 15 and you realize you never collected their W-9. You email them. They don’t respond for a week. You email again. They send one with an illegible TIN. You ask them to redo it. It’s now January 28 and you’re sweating.
This is the single most common 1099 problem. The fix is simple: collect the W-9 before you make the first payment. No W-9, no check.
Problem #2: Payments not tied to the right vendor
Bank transactions often show up as “ACH PAYMENT 847291” or “ZELLE TRANSFER TO J SMITH.” If those payments aren’t matched to the correct vendor in QuickBooks, they won’t appear on the 1099 report. You might categorize $3,000 of contractor payments to a generic “Subcontractors” expense account without linking them to specific vendors. The money went to the right place, but QuickBooks doesn’t know who received it.
When you run your 1099 report in December, those payments are invisible.
Problem #3: Mixing payment methods without tracking
You paid your graphic designer $2,000 by check and $1,500 through PayPal. The check goes on the 1099-NEC. The PayPal payment does not (PayPal reports it on a 1099-K). But if you don’t track which payments went through which method, you’ll either over-report or under-report. Both create problems.
Over-reporting means your contractor’s income looks higher than it is. Under-reporting means the IRS might notice the gap between what you paid and what you reported.
Problem #4: The “I forgot they hit $600” surprise
You hired someone for a small project in March — $400. Then another quick job in September — $350. Neither payment seemed like a big deal. But combined, that’s $750 and you owe them a 1099. If you’re not tracking cumulative totals by vendor, these surprises pop up in January when it’s too late to collect a W-9 gracefully.
Setting up contractor tracking in QuickBooks Online
QuickBooks Online can track 1099 payments automatically, but only if you set up each vendor correctly from the start. Here’s the step-by-step process.
Step 1: Enable 1099 tracking in your QBO account
Go to Settings (gear icon) → Account and settings → Expenses tab.
Under the 1099 section, make sure the toggle is turned on. This enables the 1099 contractor tracking features across your account.
QuickBooks will ask you to map your expense accounts to the correct 1099 box. For most businesses, you’ll map your subcontractor or professional services accounts to Box 1 — Nonemployee Compensation on the 1099-NEC.
This mapping tells QuickBooks which expenses count toward 1099 reporting. If you skip it, the 1099 report won’t pull the right numbers even if your vendors are set up correctly.
Step 2: Set up each contractor as a 1099 vendor
Go to Expenses → Vendors → click the vendor name (or create a new vendor).
Click Edit and check the box labeled “Track payments for 1099.”
Enter the contractor’s Tax ID (SSN or EIN) from their W-9. This is required — you cannot file a 1099 without it.
Enter their legal name exactly as it appears on the W-9. If the name on the 1099 doesn’t match IRS records, you’ll get a notice.
Enter their mailing address. This is where the recipient copy of the 1099 gets sent (or where the IRS expects it to go, even if you e-deliver).
Do this when you first create the vendor. Not in December. Not when you realize you need to file. The day you decide to pay someone as a contractor, that’s the day you set them up as a 1099 vendor in QuickBooks.
What about existing vendors you forgot to mark?
If you have vendors in QuickBooks who should be tracked for 1099 but weren’t, you can fix it retroactively. Edit the vendor, check the 1099 box, and enter their tax information. QuickBooks will include their prior payments in the 1099 report going forward. But you’ll want to manually verify the totals, because payments made before the vendor was marked might have been categorized to non-mapped expense accounts.
Building a W-9 collection system
The W-9 is just a single-page IRS form. But collecting them consistently is where most businesses fall apart. Here’s a system that actually works.
Rule: No W-9, no first payment
Make this a firm policy. Before you cut the first check or send the first ACH payment to any new contractor, you need a completed W-9 on file. Most contractors are used to this. If someone pushes back, that’s a red flag you probably want to notice anyway.
Send a fillable PDF or use an e-signature tool
The IRS has a fillable W-9 PDF on irs.gov. You can also use tools like DocuSign, HelloSign, or even a simple Google Form that collects the same information. The easier you make it for the contractor, the faster you get it back. A link in your initial “welcome, here’s how we work together” email works well.
Store them securely
W-9s contain Social Security numbers and EINs. Don’t leave them sitting in your email inbox. Store them in an encrypted folder, a password-protected drive, or a secure document management system. You need to keep them for at least four years after the last 1099 you filed for that contractor.
Review annually
Contractors move. They change business names. They switch from sole proprietor to LLC. A quick annual check in October or November — “is the information on your W-9 still current?” — catches changes before they become filing errors.
Monthly and quarterly tracking workflow
This is the core of keeping 1099 prep painless. Instead of one massive effort in January, spread small checks throughout the year.
Monthly (5 minutes)
- Verify vendor assignment: When you categorize bank transactions, make sure contractor payments are linked to the correct vendor — not just dumped into a generic expense category. The vendor name is what ties the payment to the 1099 report.
- Check new contractors: Did you hire anyone new this month? If yes, confirm you have their W-9 and that they’re set up as a 1099 vendor in QuickBooks.
- Glance at payment methods: If you paid a contractor through both direct methods (check, ACH) and third-party processors (PayPal, Venmo), make a note. You’ll need to separate these at year-end.
Quarterly (15 minutes)
- Run the 1099 Detail Report: In QuickBooks Online, go to Reports and search for “1099 Transaction Detail Report.” This shows year-to-date payments by vendor. Look for vendors approaching the $600 threshold — if someone is at $400 after Q2, they’ll probably cross $600 by year-end. Collect their W-9 now while there’s no pressure.
- Verify TIN accuracy: QuickBooks will flag vendors marked for 1099 tracking that are missing a Tax ID. Fix those now. You can also use the IRS TIN Matching service (available through e-Services) to verify that names and TINs match IRS records.
- Reconcile your accounts: Unreconciled transactions can hide contractor payments that weren’t properly categorized. Keeping your bank reconciliation current means the 1099 data is complete.
October/November (30 minutes)
- Full 1099 dry run: Run the 1099 report as if you were filing today. Check every vendor on the list. Are the totals reasonable? Does anyone look too high or too low? Are there vendors who should be on the list but aren’t?
- Send W-9 update requests: Email your active contractors asking them to confirm their W-9 information is still current. Changed addresses, new EINs, name changes — catch them all before December.
- Confirm expense account mapping: Go back to Settings → Expenses → 1099 and verify your account mappings haven’t changed. If you added new expense accounts during the year, map them now.
If you follow this schedule, January becomes a 30-minute exercise: run the final report, review it, and file. No scrambling. No chasing down contractors for W-9s. No surprises.
Payment methods: what counts and what doesn’t
This is where a lot of over-reporting and under-reporting happens. The rule is straightforward, but the reality of modern payment methods makes it confusing.
| Payment Method | Report on 1099-NEC? | Why |
|---|---|---|
| Check | Yes | Direct payment, no third-party reporting |
| ACH / Wire transfer | Yes | Direct bank-to-bank payment |
| Cash | Yes | Direct payment (keep records!) |
| Zelle | Yes | Bank-to-bank transfer, not a payment processor |
| Credit/debit card | No | Reported by card processor on 1099-K |
| PayPal | No | Third-party processor, reported on 1099-K |
| Venmo (business) | No | Third-party processor, reported on 1099-K |
| Stripe | No | Third-party processor, reported on 1099-K |
The Zelle exception catches people
Zelle looks like Venmo or PayPal, but it works differently. Zelle is a direct bank-to-bank transfer — it’s not a third-party payment processor and does not file 1099-K forms. If you pay a contractor through Zelle, that payment goes on your 1099-NEC just like a check or ACH transfer. This trips up a lot of business owners who assume all “apps” are the same.
In QuickBooks, the best practice is to note the payment method somewhere — either in the memo field or by using separate expense accounts for different payment types. When you run the 1099 report at year-end, you can then exclude the payments that went through third-party processors. QuickBooks Online’s 1099 wizard now asks about payment methods, which helps, but having clean records makes the whole process faster.
State 1099 requirements
Filing federal 1099-NEC forms is only half the picture. Many states have their own 1099 filing requirements, and they’re easy to overlook.
The Combined Federal/State Filing Program
The IRS offers the Combined Federal/State Filing (CF/SF) program, which forwards your 1099 data to participating states automatically when you e-file with the IRS. This covers many states, but not all. If your state participates, you might not need to file separately at the state level. But if your state doesn’t participate — or if you have contractors in non-participating states — you’ll need to file with those states directly.
States with no income tax (Florida, Texas, Nevada, Washington, Wyoming, South Dakota, Alaska, Tennessee, New Hampshire) generally don’t require 1099 filing at the state level. But states like California, New York, and Massachusetts have their own filing requirements and deadlines that may differ from the federal deadline.
The practical advice: if you e-file your 1099-NEC forms through an IRS-approved e-file provider (which includes QuickBooks Online’s built-in filing), most participating states will receive the data automatically. Check whether your state participates in the CF/SF program, and if it doesn’t, factor in the additional state filing deadline when planning your January timeline.
Automating contractor payment categorization
The single biggest failure point in 1099 tracking is categorization. If contractor payments don’t get assigned to the right vendor and the right expense account, they won’t appear on the 1099 report. And manual categorization is where mistakes happen.
Why categorization breaks 1099 tracking
Bank feed transactions come in looking like “ACH DEBIT 03847291 SMITH CONSULTING” or “ZELLE PAYMENT TO MARIA G.” QuickBooks tries to match these to vendors, but the matching is hit-or-miss — especially for ACH payments where the description is just a reference number. If you’re categorizing transactions in bulk and not paying close attention, it’s easy to assign a contractor payment to the right expense account but forget to attach the vendor.
That payment still shows up on your P&L. Your expenses are correct. But the 1099 report pulls by vendor, not by expense account. So the money disappears from your 1099 obligations — until the IRS asks why you paid someone $12,000 and didn’t report it.
How CodeIQ helps with contractor payment tracking
CodeIQ automates the categorization step that makes or breaks 1099 tracking. When it processes your bank transactions, it doesn’t just assign expense categories — it maps transactions to specific vendors based on patterns it learns from your historical data.
- Vendor matching: Learns that “ACH DEBIT 03847291” is always Smith Consulting, and assigns both the expense account and the vendor name automatically
- Pattern recognition: If you pay a contractor monthly, CodeIQ recognizes the recurring pattern and categorizes each payment consistently
- Posts to QuickBooks: Approved transactions go directly into QBO with the vendor attached, so your 1099 report stays accurate month after month
- Corrections stick: If you correct a vendor assignment, CodeIQ remembers and applies that correction to future transactions automatically
The result: when you run the 1099 report in January, the vendor totals are actually complete because every contractor payment was correctly assigned throughout the year.
Even without automation, the principle is the same: make sure every contractor payment in QuickBooks has the vendor name attached, not just the expense account. That’s the link between your bank transactions and your 1099 obligations.
Year-end filing checklist
If you’ve been tracking throughout the year, this is the easy part. Here’s the complete timeline.
| When | What | Details |
|---|---|---|
| Early January | Final reconciliation | Make sure December bank transactions are fully categorized and reconciled. Any pending items should be resolved before you run the 1099 report. |
| January 5–10 | Run 1099 report | In QBO, go to Taxes → 1099 filings. Review each vendor, verify totals, and check for missing TINs. Cross-reference against your W-9 folder. |
| January 10–15 | Resolve discrepancies | If any vendor totals look wrong, check for miscategorized transactions or payments made through third-party processors that should be excluded. |
| January 15–20 | Verify addresses | Confirm mailing addresses for all contractors getting a 1099. Returned mail means your contractor didn’t get their copy, which can cause issues. |
| January 20–25 | File or prepare to file | If filing through QBO, start the e-filing process. If using a third-party service (Tax1099.com, Track1099, etc.), upload your data. If filing on paper, order forms from the IRS (they’re free but take time to arrive). |
| January 31 | DEADLINE | 1099-NEC must be filed with the IRS AND furnished to recipients by this date. No extension available. If you e-file 10 or more forms, e-filing is mandatory. |
| March 31 | E-filing deadline (1099-MISC only) | If you also file 1099-MISC forms (rent, royalties, etc.), the e-filing deadline is March 31. This does NOT apply to 1099-NEC — that deadline remains January 31. |
IRS penalties for late or missing 1099s
The penalty structure is tiered based on how late you file:
- Within 30 days of deadline: $60 per form
- 31 days late through August 1: $130 per form
- After August 1: $310 per form
- Intentional disregard: $630 per form (no cap)
For small businesses, maximum penalties are capped around $660,000 per year for non-intentional failures. That sounds astronomical, but even a handful of missed forms at $310 each adds up fast. Five missed contractors is $1,550 in penalties.
The complete pre-filing checklist
- All December transactions categorized and reconciled
- W-9 on file for every vendor on the 1099 report
- TIN verified for each vendor (name + EIN/SSN match)
- Third-party processor payments (PayPal, credit card, Stripe) excluded from totals
- Vendor addresses confirmed (especially for contractors who moved during the year)
- Expense account mapping reviewed in QBO settings (all contractor accounts mapped to Box 1)
- Vendors under $600 reviewed (are they really under $600, or were some payments miscategorized?)
- Corporate vendors excluded (C-corps and S-corps don’t get 1099-NEC, except attorneys)
- Filing method chosen (QBO e-filing, third-party e-file service, or paper forms ordered)
- State filing requirements checked (CF/SF participation vs. separate state filing)
Keep your contractor payments categorized all year
CodeIQ automates transaction categorization in QuickBooks, including vendor assignment for 1099 tracking. Process a full month of transactions in about two minutes, with vendors correctly matched from day one.
Try CodeIQ FreeFrequently Asked Questions
What is the $600 threshold for 1099-NEC reporting?
If you pay a non-employee (independent contractor, freelancer, or unincorporated vendor) $600 or more during the calendar year for services, you are required to file a 1099-NEC with the IRS and provide a copy to the recipient. This applies to payments made to individuals, partnerships, and LLCs taxed as sole proprietorships or partnerships. Payments to C-corporations and S-corporations are generally exempt, with some exceptions like legal fees. The $600 threshold is cumulative across the entire tax year, not per payment.
When are 1099-NEC forms due to the IRS?
The deadline for 1099-NEC is January 31 of the following year. This single deadline applies to both recipient copies (the form you send to your contractor) and the IRS filing, whether you file on paper or electronically. There is no automatic extension available for 1099-NEC forms. If you file more than 10 forms, you must e-file. Missing the deadline can result in penalties ranging from $60 to $310 per form depending on how late the filing is, with a maximum penalty of over $1 million for small businesses.
How do I mark a vendor as a 1099 contractor in QuickBooks Online?
In QuickBooks Online, go to Expenses → Vendors, select the vendor, and click Edit. Check the box that says “Track payments for 1099.” You will also need to enter their Tax ID (SSN or EIN) from their W-9 form, their legal name, and their mailing address. Once this is enabled, QuickBooks will automatically track all payments to that vendor toward the $600 reporting threshold. You should do this when you first set up the vendor, not at year-end.
What happens if I forget to file a 1099-NEC?
The IRS charges penalties for late or missing 1099-NEC filings. For forms filed within 30 days of the January 31 deadline, the penalty is $60 per form. For forms filed after 30 days but by August 1, the penalty is $130 per form. After August 1, the penalty increases to $310 per form. If you intentionally disregard the filing requirement, the penalty is $630 per form with no maximum cap. For small businesses (gross receipts of $5 million or less), total penalties are capped at approximately $660,000 per year for non-intentional failures.
Do I need to send a 1099 for payments made through PayPal, Venmo, or credit card?
No. Payments made through third-party payment processors like PayPal, Venmo (business profiles), Stripe, or credit card are reported by the payment processor on a 1099-K, not by you on a 1099-NEC. You should only include payments made by check, ACH, wire transfer, cash, or other direct methods on your 1099-NEC. If you paid a contractor $8,000 total but $5,000 went through PayPal and $3,000 by check, you only report $3,000 on the 1099-NEC.
Can I automate 1099 contractor tracking in QuickBooks?
QuickBooks Online has built-in 1099 tracking, but it only works if you correctly set up each vendor as a 1099 contractor when you first create them and consistently categorize payments to the right vendor. The weak link is usually transaction categorization: if contractor payments get lumped into generic expense categories without being tied to the correct vendor, the 1099 report will be incomplete. Tools like CodeIQ can help by automatically categorizing bank transactions and mapping them to the correct vendors, which keeps your 1099 data accurate throughout the year.