Year-end accounting checklist for contractors

Close the year in two passes. First, make the books match the bank: reconcile every account, chase what customers owe, and put equipment and owner pay where they belong. Then handle what changed for 2026: a Form 1099-NEC is now required only once you've paid someone $2,000 in the year, W-2s carry a new code for overtime, and qualifying equipment can be written off 100% in the first year. 1099-NECs for 2026 payments are due February 1, 2027, the same day as W-2s.

This is the December list. Year-round planning, from estimated taxes to how you pay yourself, lives in tax planning for contractors.

The checklist

On deposits: Publication 538 says you generally report an advance payment as income in the year you receive it, and only accrual-method businesses can elect to push it to the next year. A big deposit in late December can raise this year's bill if nobody planned for it.

What changed for 2026

The 1099-NEC threshold moved

For payments made in 2026, you file a 1099-NEC for a sub once you've paid them $2,000 for the year, up from $600 through 2025, according to the IRS instructions. The 1099 rules for contractors post walks through which subs get one. The total includes the parts and materials the sub billed you, not just labor. The IRS says the threshold may be adjusted for inflation starting in 2027. Fewer one-off helpers will need a form, but your regular subs still will. The deadline is February 1, 2027, to both the IRS and the sub.

Overtime gets its own W-2 code

For 2025 through 2028, employees can deduct qualified overtime on their own returns, up to $12,500 a year ($25,000 on a joint return). Only the premium half of time-and-a-half counts, and only for overtime the federal Fair Labor Standards Act requires, generally hours over 40 in a week. A richer premium, such as double time, still counts only for the half the law requires (IRS Q&A), and the deduction phases out above $150,000 of modified adjusted gross income ($300,000 for joint filers). Your part as the employer is reporting it: the 2026 W-2 instructions add box 12, code TT, for that amount, and overtime is still subject to withholding, Social Security and Medicare. If your techs log overtime through the summer rush at an HVAC company, confirm in December that your payroll software tracks the premium on its own line. Rebuilding it from timecards in January is a bad week.

Bonus depreciation and Section 179

The 2025 law made 100% bonus depreciation permanent for qualifying property acquired after January 19, 2025, so most equipment you buy and put to work can be deducted in its first year instead of over several (IRS summary). Section 179 is the other route, capped at $2,560,000 for tax years beginning in 2026 and reduced once you place more than $4,090,000 of property in service (Rev. Proc. 2025-32). Section 179 is also limited to your taxable income from the business, and vehicles have extra limits, covered below. Whether to use either one is a planning call, which the next section covers.

Before you buy a truck in December

Two rules first, both from Publication 946. Equipment counts for 2026 only if it's placed in service by December 31, which means ready and available for its job. The IRS example is a machine delivered one year and installed the next: it counts in the year it was installed. A truck still at the upfitter on New Year's Eve may have the same problem, so ask your tax pro before you count on it.

Second, the truck's cost includes what you financed. Depreciation runs on the full price whether you paid cash or took a loan, so paying the loan off early moves cash out of the bank without adding a deduction.

That's the trap Brandon Vaughn, who coaches home service owners, flagged for two owners who wanted to pay off the trucks they'd bought that year in one shot. His first question was about taxes:

…are you guys doing schedule 179 on those trucks that you bought? Are you depreciating them a hundred percent this year? Cause if you're going to end up paying all of them for cash in one go paying those down, you definitely don't want to pay them all down and then be stuck with a tax burden on those things.

The opposite mistake is spending to shrink the bill. An owner told Brandon he'd been buying postage and supplies in advance for years to keep his taxes down. Brandon's answer:

Actually I'm fine paying taxes because if I'm paying taxes, that means that I'm bankable and that my company's healthy. Sometimes it can bite you in the butt to show a break even for a long period of time. And then you go into a bank and need a line of credit or need to get some vehicles for growth.

A deduction saves you your tax rate on what you spend, not the whole amount. Buy the truck in December if you need the truck. Then decide with your CPA whether to write it off now or over time, knowing your lender reads the lower profit too.

Check the vehicle rules in Publication 946 before you count on the full amount. A pickup or van rated at 6,000 pounds gross vehicle weight or less is treated as a passenger automobile, with a yearly cap on depreciation, unless it's been modified for work with permanent shelving and the company's name painted on it. A heavier SUV is capped at $32,000 under Section 179. And a vehicle used 50% or less for business can't take Section 179, and usually can't take bonus depreciation either. One more thing to weigh: once a truck is written off with Section 179 or bonus depreciation, you can't use the IRS mileage rate on it.

Settle owner pay before the year closes

Brandon's own habit was to keep his draws conservative during the year and decide on a bonus in December, after setting aside what the business needed to get through the slow season:

…at the end of the year I'd be like sweet all I need $30,000 to make it through the winter time, you know as a loss. So I'm gonna keep that 30,000. I have another 70,000. I'm gonna take $40,000 of that.

How that money comes out, as payroll, a distribution or an owner draw, depends on your entity, and it changes your taxes. Settle it with your CPA in December, not April. If you'd like a second look before then, bring your December bank statements and year-to-date P&L to a free profit call.

Common year-end questions

Do I send a 1099-NEC to a sub that's an LLC?

It depends on how the LLC is taxed, which is why you collect a W-9 before you pay. The IRS rules cover payments to individuals and partnerships, and payments to corporations generally don't need a 1099-NEC, with exceptions such as attorneys' fees.

I paid a sub $1,800 in 2026. Do they get a 1099-NEC?

Not for 2026 payments, because the threshold is now $2,000. The exception is a payment you backup-withheld on, which needs a form regardless of the amount. Keep the W-9 and the invoices anyway; the sub still owes tax on that income.

Can equipment sit in supplies until my CPA sorts it out?

Better not. To depreciate a pressure washer, a drain machine or a truck upfit, or take Section 179 on it, your CPA needs its cost and the date it went into service, and a supplies account hides both. It also makes the year's margin look worse than it was. Whoever handles your tax prep and planning will ask for that list, and the deductions trades owners miss covers what else to gather.