When you pay subcontractors but didn’t issue a 1099-NEC, here’s what matters:
1. Deductibility under § 162:
Under IRC 162, any ordinary & necessary business expense is deductible if you can prove the payment—by check, bank record, or reliable reconstruction (the “Cohan Rule”).
Not issuing a 1099 doesn’t eliminate your right to deduct the expense.
2. 1099 Requirement under § 6041:
If you pay a contractor over $2,000, you must issue a Form 1099-NEC so the IRS can match the income to their return. That’s a separate rule—non-compliance can trigger penalties (~$100 per missing form).
3. Two separate rules — two separate consequences:
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Section 162 governs whether the expense is deductible—proof of payment matters, not the filing of a 1099.
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Section 6041 mandates reporting the payment—omitting the 1099 triggers penalties, but doesn’t void the deduction itself.
What to do if an IRS auditor denies your deduction:
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Push back—auditors can be mistaken; escalate to a supervisor.
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Appeal the decision—an IRS Appeals Officer may clarify the distinction.
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Go to Tax Court—judges understand the separation and often side with the taxpayer.
Takeaway:
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You can still deduct subcontractor expenses if you can prove payment—even without a 1099.
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However, issue required 1099s to avoid penalties.
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If you face resistance, leverage your rights: escalate, appeal, or litigate.
Know the difference between deducting expenses and reporting obligations—it could save you thousands.