I need to do several renovations on some rental units and am evaluating two options. 1) Hire licensed contractors and pay $30k. 2) Hire an unlicensed contractor who has an excellent reputation and good references. Pay $20k but he takes it under the table. He will provide receipts for materials but not labor.
Thus, when it comes to tax return season, I plan to report and deduct the material expenses but not the labor. Am I doing anything illegal here?
if you have to ask , you probably are . Is the risk worth the reward?
You're helping somebody evade taxes, which is against several federal laws. You're also taking a huge risk.
First, under the table usually denotes no written contracts either. How will you mitigate any defects or problems during or after the contract? How will you assure that he/she will be back to fix errors and defects?
Second, under the table usually denotes no insurance either. If this person gets hurt on your property, what's your exposure? (Hint: pretty big)
Third, in the event that he/she ever gets audited (and the IRS may be slow, but they are thorough...) and they find your name in his/her records, you can bet that the you'll be receiving an audit notification letter as well. At the very least, you'll be fined for not issuing a 1099 when you should have, assuming you are in compliance in every other area.
Fourth, by not declaring the expense of the contractor, you are artificially inflating your income, which the IRS is fine with - they are technically ok if you want to overpay your taxes. But in the event you use that tax return to apply for a mortgage, you may have just committed mortgage fraud.
Not legal advice, but I wouldn't do it.
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