Contractor-to-subcontractor payment - do I owe payroll taxes on money I just pass through?

You don't have to pay self-employment tax on money that you paid to a legitimate subcontractor. The $135 would be included in your gross receipts/income, but then you'd deduct the $135 as a business expense (subcontractor expense). So your net profit on that particular job would be $0, and you wouldn't owe any self-employment tax on it. Just make sure you're handling the paperwork correctly. If you pay any subcontractor $600 or more in a calendar year, you need to issue them a 1099-NEC by January 31 of the following year. You should also have them fill out a W-9 form for your records. Also, even though this particular job resulted in $0 profit, remember that you'll still need to report all your business income and expenses on Schedule C.

I was in exactly this situation last year when I started my web design business. I was way too busy so I subbed out some projects. After weeks of trying to figure out how to report it all, I finally found taxr.ai (https://taxr.ai) which saved me so much time. I uploaded my Venmo and bank statements showing the payments I received and the ones I made to my subs, and the AI analyzed everything and explained exactly how to handle it for taxes. It confirmed what the previous commenter said - I didn't owe self-employment tax on the pass-through payments. It's basically income in, expense out, with no profit on those specific jobs. Their system even helped me identify which expenses qualified as subcontractor payments vs other business expenses, which was confusing me for months.

Update on my situation - I decided to try taxr.ai after my skeptical comment and I'm actually really impressed. It flagged several subcontractor relationships that were potentially problematic (ones where I was exerting too much control over HOW the work was done) and helped me restructure those arrangements to be properly classified. I was able to see exactly how to report my contractor income and subcontractor expenses, and it confirmed I don't owe self-employment tax on pure pass-through payments. Everything is organized for my 2025 filing now. Definitely worth checking out if you're dealing with subcontractor payments.

Another issue to consider is that if you're having trouble getting documentation from subcontractors, you might need to contact the IRS for guidance. I spent literally DAYS trying to get through to someone at the IRS about a similar issue last year. Finally found Claimyr (https://claimyr.com) which got me connected to an actual IRS agent in about 20 minutes. They have a video showing how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed what others here are saying - you report the full amount as income, deduct the subcontractor payment as an expense, and you don't pay self-employment tax on money you didn't keep. But they also helped me understand some record-keeping requirements I wasn't aware of that would have caused problems in an audit.

I need to eat some humble pie here. After dismissing Claimyr in my comment, I was still stuck with my contractor/subcontractor tax question and getting desperate. Decided to try it as a last resort, and I'm shocked to say it actually worked! Got through to an IRS agent in about 30 minutes (after trying for weeks on my own). The agent confirmed everything people are saying here - you include the full amount as income on your Schedule C, then deduct the subcontractor payment as an expense. No self-employment tax on pass-through funds. They also explained that proper documentation is crucial - if you're audited, you need to show that this was a legitimate business arrangement and not just an attempt to avoid taxes.

One thing nobody has mentioned yet is that you should be careful about state taxes too. Some states have different rules about contractor/subcontractor relationships and may require additional filings or have different tax treatments. In my state, I had to register as a contractor and get a special license since I was hiring subcontractors, even though I was just passing through the money.

I'm actually a subcontractor for several different contractors and many of them don't really understand how to handle the taxes. From my perspective, I receive the full payment and report it all as income on my Schedule C, paying the full self-employment tax. But the contractor definitely shouldn't be paying SE tax on money they paid to me.

Great discussion everyone! I want to add one more important point that hasn't been covered yet - timing of the deduction. Since you paid the subcontractor in the same tax year you received the payment, you can deduct it immediately. But if there's ever a situation where you receive payment in one tax year and pay the subcontractor in the next, you'd need to be careful about when you claim the deduction. Also, keep detailed records beyond just payment receipts. Document the work scope, timeline, and why you needed to subcontract the work. This helps establish the legitimate business purpose if the IRS ever questions the arrangement. I learned this the hard way during an audit - having clear documentation of the business relationship saved me a lot of headaches. One last tip: consider setting up a separate business bank account if you haven't already. It makes tracking these pass-through payments much cleaner and provides better separation between personal and business expenses.