When you enter the income from the 1099, you will also have the opportunity to include expenses. Materials is one of the categories and so is contract labor. Since you will only be issuing $250 to your "co-owner", then you will not need to file a 1099 for the money you paid him.

As an aside, a sole-proprietorship is meant for one person. If you continue this endeavor, you will either need to form a Partnership, which is quite involved, or have the 1099 issued to each of you for your own profit.