W-9s & 1099s: How do I pay contractors "under the table"?

55 Replies

I've have guys doing rehab work without a contract, and I pay them with checks out of a business account. They're licensed, but this is "side-work" for them. They do good work and don't charge a lot, so I thought everything was good.

But then I read @BrandonHall 's "Accounting Hack" article which says that I should be sending them 1099's and asking them for their Tax ID number.

So I asked some of them to fill out a W-9, which asks them for their SSN or EIN. But they don't want to give it to me, because they don't want to pay taxes! It turns out they were charging me a lower price because they like getting paid "under the table".

They money's gone, the year's almost over, and THE TAX MAN COMETH. Am I in trouble?

@Carlo Michelotti how did you request the Form W-9? You will need to prove to the IRS that you attempted to get that information from the contractor. So emails or certified mail requests are good ideas. 

In the future, don't start with a contractor until you have a W-9 from them. I'd even include this in your contract "payment for services will not be rendered until a completed Form W-9 has been delivered to our office."

Ultimately, while the cheap labor is nice, you need to protect your business. Missing 1099s can be costly.

I pay contractors under the table all the time. It is a major part of the North American economy and very common where I operate my business.

You make sure in advance that you are getting a reduced price to offset more than your tax credit would amount to. I save money , they make money, all is good.

Money talks, cash screams lets do business.

It really only boils down to how you choose to do business. Very understandable that most will want to operate strictly by the books especially as you grow into a corporation. For the little guy the financial savings are possibly more important.

Guys love "under the table" specifically because they never intend to pay taxes on it. I never agree to under the table arrangements. They put you in an impossible situation. Even if you send them certified mail requesting their W-9 you will have to show all that documentation to the "tax man" if and when he asks. Contact your CPA and see what you should do and learn from the mistake. 

I am confused a little bit with this.  Why can't I just send a check to a plumber or electrician, and use that as a receipt along with invoice that he provides. I always get invoices and always send out checks or use my Credit Card.  I never pay in cash. People are not only hesitant to give out their TAX ID # they also get nasty when asked.  

Also, as a side note, I own the rentals under my name and not any LLC. I also send out checks from my personal accounts that I use for the rentals. So there is no mingling of personal expenses vs real estate expenses.

I would never recommend you violate the law to save a few bucks. Anyone that cheats on little things is more likely to cheat on big things and I won't do business with them.

He who is faithful with little will be faithful with much.

Originally posted by @Brandon Hall :

@Carlo Michelotti how did you request the Form W-9? You will need to prove to the IRS that you attempted to get that information from the contractor. So emails or certified mail requests are good ideas. 

In the future, don't start with a contractor until you have a W-9 from them. I'd even include this in your contract "payment for services will not be rendered until a completed Form W-9 has been delivered to our office."

Ultimately, while the cheap labor is nice, you need to protect your business. Missing 1099s can be costly.

 I just called him and asked him for his email address. I have his physical address, so could send him certified mail.

All contracts have been verbal at this point. He says that he'd be willing to go "above board", but that I'd be seeing a 20%+ increase in labor prices if we do things that way.

I myself have done side-work for cash, and haven't thought much of the pros and cons. As I understand it, here are the...

...

PRO's:

- Investors attract union & undocumented workers, both of whom don't want financial records to endanger their union membership and/or US residency status(es).

- Investors pay less in labor.

- Contractors don't have to pay taxes.

...

CON's:

- Investors don't get protection of written contracts, liscensing/bonding, etc.

- Investors can get prosecuted for tax dodging? or not reporting payments to independent contractors?

- Contractors can get prosecuted too if they are audited?

...

I guess I don't have a good understanding of the down-sides, and how bad this kind of thing really is. It seems like a LOT of people are doing it though. Does anyone have data that can help to quantify the "cons"... the liabilities? Does the government really care about the little guys?

Same thing happened to me a few years ago. CPA told me the same thing. Cover yourself and show that you made an attempt to get it. If they refuse to provide the information, then you can longer use them going forward. If you fail to 1099 them and then continue using them, then you can get in trouble.

One way to avoid having to 1099 them is to have them create a corporation. My understanding (and this again is my understanding in that I am NOT a cpa and advise you to seek one out to ask) is that if you write checks to a company, then you are not required to 1099 them.

I also think this same rule applies if they form an LLC. But I think there are some additional rules for LLCs and 1099's. Maybe something like it has to be a single member LLC instead of a partnership LLC?

But that would be one way for you to avoid the IRS dinging you for failing to 1099 someone. And then it would be up to the contractors to decide if they want to risk it or not.

Ultimately, I don't see why its my job to have to 1099 these guys as individuals either. If I was paying them cash, that would be one thing. But if I'm paying by a check, I should not have to 1099 them and it should be the IRS' job to catch them - not mine.

But since thats not how they roll, I really only care about covering myself. So I just go by the rules. And then tell any contractor that refuses to provide the information that they need to create a corp or llc or I can't use them.

Like Nathan said, if they're willing to cheat one way, they are probably willing to cheat in other ways. I wouldn't trust them and wouldn't allow a contractor to begin work until they have given you a W-9.

A legitimate business person isn't trying to cheat on taxes.

Originally posted by @Mike H. :

Same thing happened to me a few years ago. CPA told me the same thing. Cover yourself and show that you made an attempt to get it. If they refuse to provide the information, then you can longer use them going forward. If you fail to 1099 them and then continue using them, then you can get in trouble.

One way to avoid having to 1099 them is to have them create a corporation. My understanding (and this again is my understanding in that I am NOT a cpa and advise you to seek one out to ask) is that if you write checks to a company, then you are not required to 1099 them.

I also think this same rule applies if they form an LLC. But I think there are some additional rules for LLCs and 1099's. Maybe something like it has to be a single member LLC instead of a partnership LLC?

But that would be one way for you to avoid the IRS dinging you for failing to 1099 someone. And then it would be up to the contractors to decide if they want to risk it or not.

Ultimately, I don't see why its my job to have to 1099 these guys as individuals either. If I was paying them cash, that would be one thing. But if I'm paying by a check, I should not have to 1099 them and it should be the IRS' job to catch them - not mine.

But since thats not how they roll, I really only care about covering myself. So I just go by the rules. And then tell any contractor that refuses to provide the information that they need to create a corp or llc or I can't use them.

I get the frustration from having to 1099 people but how would the IRS get the information from your return unless you are listing out every payment you make to everyone? Paying by check just shows that you paid someone specific but that doesn't translate to what's reported on your tax return.

Originally posted by @Chinmay J. :

I am confused a little bit with this.  Why can't I just send a check to a plumber or electrician, and use that as a receipt along with invoice that he provides. I always get invoices and always send out checks or use my Credit Card.  I never pay in cash. People are not only hesitant to give out their TAX ID # they also get nasty when asked.  

Also, as a side note, I own the rentals under my name and not any LLC. I also send out checks from my personal accounts that I use for the rentals. So there is no mingling of personal expenses vs real estate expenses.

 The purpose of a 1099 is not to verify your expense. Rather, it is a compliance tool that helps the IRS in determining an individuals taxable income. In the event of an audit, if it is determined you should have issued a 1099 and you did not make any attempt, you'll be slapped with some hefty penalties. I'd suggest taking the time to get them done. 

Originally posted by @Frank Palomino :
Originally posted by @Chinmay J.:

I am confused a little bit with this.  Why can't I just send a check to a plumber or electrician, and use that as a receipt along with invoice that he provides. I always get invoices and always send out checks or use my Credit Card.  I never pay in cash. People are not only hesitant to give out their TAX ID # they also get nasty when asked.  

Also, as a side note, I own the rentals under my name and not any LLC. I also send out checks from my personal accounts that I use for the rentals. So there is no mingling of personal expenses vs real estate expenses.

 The purpose of a 1099 is not to verify your expense. Rather, it is a compliance tool that helps the IRS in determining an individuals taxable income. In the event of an audit, if it is determined you should have issued a 1099 and you did not make any attempt, you'll be slapped with some hefty penalties. I'd suggest taking the time to get them done. 

I talked to my CPA last winter about the same exact thing. He said if it's a rental property under my personal name, not LLC then I don't need to send out 1099.. Is he correct or I need a new CPA? Its just a PITA to have to a) find people who will not get pissed at us asking for this and B) having to send it out.

Originally posted by @Chinmay J. :
Originally posted by @Frank Palomino:
Originally posted by @Chinmay J.:

I am confused a little bit with this.  Why can't I just send a check to a plumber or electrician, and use that as a receipt along with invoice that he provides. I always get invoices and always send out checks or use my Credit Card.  I never pay in cash. People are not only hesitant to give out their TAX ID # they also get nasty when asked.  

Also, as a side note, I own the rentals under my name and not any LLC. I also send out checks from my personal accounts that I use for the rentals. So there is no mingling of personal expenses vs real estate expenses.

 The purpose of a 1099 is not to verify your expense. Rather, it is a compliance tool that helps the IRS in determining an individuals taxable income. In the event of an audit, if it is determined you should have issued a 1099 and you did not make any attempt, you'll be slapped with some hefty penalties. I'd suggest taking the time to get them done. 

I talked to my CPA last winter about the same exact thing. He said if it's a rental property under my personal name, not LLC then I don't need to send out 1099.. Is he correct or I need a new CPA? Its just a PITA to have to a) find people who will not get pissed at us asking for this and B) having to send it out.

The same questions is asked on Sch E as you would be asked on a partnership or S-Corp. Did you make any payments in 2016 that would require you to file Form(s) 1099? The following question is "If "Yes" did you or will you file all required Forms 1099. 

So even if you own the property in your own name if you are required by the General Information return instructions because you paid someone over $ 600 you should be filing a 1099. 

Originally posted by @Chris Clark :
Originally posted by @Chinmay J.:
Originally posted by @Frank Palomino:
Originally posted by @Chinmay J.:

I am confused a little bit with this.  Why can't I just send a check to a plumber or electrician, and use that as a receipt along with invoice that he provides. I always get invoices and always send out checks or use my Credit Card.  I never pay in cash. People are not only hesitant to give out their TAX ID # they also get nasty when asked.  

Also, as a side note, I own the rentals under my name and not any LLC. I also send out checks from my personal accounts that I use for the rentals. So there is no mingling of personal expenses vs real estate expenses.

 The purpose of a 1099 is not to verify your expense. Rather, it is a compliance tool that helps the IRS in determining an individuals taxable income. In the event of an audit, if it is determined you should have issued a 1099 and you did not make any attempt, you'll be slapped with some hefty penalties. I'd suggest taking the time to get them done. 

I talked to my CPA last winter about the same exact thing. He said if it's a rental property under my personal name, not LLC then I don't need to send out 1099.. Is he correct or I need a new CPA? Its just a PITA to have to a) find people who will not get pissed at us asking for this and B) having to send it out.

The same questions is asked on Sch E as you would be asked on a partnership or S-Corp. Did you make any payments in 2016 that would require you to file Form(s) 1099? The following question is "If "Yes" did you or will you file all required Forms 1099. 

So even if you own the property in your own name if you are required by the General Information return instructions because you paid someone over $ 600 you should be filing a 1099. 

 Are there any exception to this? Say I buy $2000 worth of material from Home Depot. I am not sending them a 1099, or am I? 

@Chinmay J. my understanding is that unless you're a "real estate professional" you may forego the reporting requirements. However, I consider it best practice to issue them. They're easy to file and you can do it yourself. If you're not comfortable doing it, your CPA can get it done at a minimal cost.

Originally posted by @Chinmay J. :
Originally posted by @Chris Clark:
Originally posted by @Chinmay J.:
Originally posted by @Frank Palomino:
Originally posted by @Chinmay J.:

I am confused a little bit with this.  Why can't I just send a check to a plumber or electrician, and use that as a receipt along with invoice that he provides. I always get invoices and always send out checks or use my Credit Card.  I never pay in cash. People are not only hesitant to give out their TAX ID # they also get nasty when asked.  

Also, as a side note, I own the rentals under my name and not any LLC. I also send out checks from my personal accounts that I use for the rentals. So there is no mingling of personal expenses vs real estate expenses.

 The purpose of a 1099 is not to verify your expense. Rather, it is a compliance tool that helps the IRS in determining an individuals taxable income. In the event of an audit, if it is determined you should have issued a 1099 and you did not make any attempt, you'll be slapped with some hefty penalties. I'd suggest taking the time to get them done. 

I talked to my CPA last winter about the same exact thing. He said if it's a rental property under my personal name, not LLC then I don't need to send out 1099.. Is he correct or I need a new CPA? Its just a PITA to have to a) find people who will not get pissed at us asking for this and B) having to send it out.

The same questions is asked on Sch E as you would be asked on a partnership or S-Corp. Did you make any payments in 2016 that would require you to file Form(s) 1099? The following question is "If "Yes" did you or will you file all required Forms 1099. 

So even if you own the property in your own name if you are required by the General Information return instructions because you paid someone over $ 600 you should be filing a 1099. 

 Are there any exception to this? Say I buy $2000 worth of material from Home Depot. I am not sending them a 1099, or am I? 

Generally speaking here is the requirement: Payments for services performed for a trade or business by people not treated as its employees.

There are lots of exceptions to when you file one and when you don't but purchasing services from a corporation also generally doesn't require a 1099. Materials are not something you should need a 1099 for.

well said @Nathan G.

Do it right. The. You never have to look over your shoulder. 

Originally posted by @Frank Palomino :

@Chinmay J. my understanding is that unless you're a "real estate professional" you may forego the reporting requirements. However, I consider it best practice to issue them. They're easy to file and you can do it yourself. If you're not comfortable doing it, your CPA can get it done at a minimal cost.

 Yes, I am a realtor and a landlord as well. And a very confused one right now... 

I guess thats my point. Why is it that if I'm paying for services from a corporation, I don't have to issue a 1099 but if I'm paying for services from an individual I do?

The reality is both a corporation and an individual are supposed to report that money as income. And apparently the IRS trusts that the corporation will report it but the individual will not. 

Well how does the IRS track the payment to the corporation? I'm not 1099'ng them..... 

So again, I still think its nonsense that we have to 1099 individuals. The IRS should audit the individuals and if they see money coming in that wasn't reported, then ding them. 

I shouldn't be the one thats inconvenienced. Its not my job to enforce the IRS collection rules.  Why don't my tenants have to issue me 1099 for income paid to me??????

How in the world is that any different?

@Chinmay J. I'm sorry you're confused! Being a realtor immediately qualifies you as a real estate professional. I'd recommend making sure you get those 1099s filed this year.

Originally posted by @Mike H. :

I guess thats my point. Why is it that if I'm paying for services from a corporation, I don't have to issue a 1099 but if I'm paying for services from an individual I do?

The reality is both a corporation and an individual are supposed to report that money as income. And apparently the IRS trusts that the corporation will report it but the individual will not. 

Well how does the IRS track the payment to the corporation? I'm not 1099'ng them..... 

So again, I still think its nonsense that we have to 1099 individuals. The IRS should audit the individuals and if they see money coming in that wasn't reported, then ding them. 

I shouldn't be the one thats inconvenienced. Its not my job to enforce the IRS collection rules.  Why don't my tenants have to issue me 1099 for income paid to me??????

How in the world is that any different?

To add to this whole confusion (thanks Congress for tax code that requires you to be the next Einstein) a lot of these "individuals" that we speak of have registered as LLCs. So why is say Home Depot, or Lowes are exceptions. BTW, Home Depot and Lowes don't just sell stuff.. They do servicing too. I had my laminate put in by HD and Lowes not too long ago. So, do I need to send them a 1099 if I am having them put in my carpet, and not send them anything if I just buy "stuff" from them.. 

I've been a real estate investor for nearly 40 years and have yet to issue a 1099. I owned active businesses and done bookkeeping for other and have issued 1099's. Here's the rules as I understand them: 

1. I do not issue 1099's to C Corps, S Corps. 

2. Technically for LLCs, you issue them for single member pass through LLCs. The firms I do the books for have very few LLC's, and for simplicity I do not 1099 them. I initially questioned vendors about their LLC setup, but the people I talk to have no idea what I'm talking about. So I either 1099 them all, or not 1099 any of them.

3. We 1099 individuals and only if their annual payments exceed $600.00.

As to my real estate business, I deal mainly with licensed, insured businesses that's normally incorporated. Based on this criteria, I see no need to 1099 them. 

Also, be careful what you 1099. One company I do books for, vendors buy stuff for us, and we reimburse them, Sometimes, we mistakenly 1099 for the reimbursement and they run into problems with the IRS. I just 1099 them for labor. One vendor was audited by the IRS and I told them she should have reported the full payment and deducted the purchase as the COGS. So the point is, if I only 1099 for labor, I don't have to get involved with vendor IRS audits and how they do the books.

Just to add, I was audited once by the IRS because a customer 1099 me wrong. He 1099 me for all payments made as compensation. The IRS said I underpaid by $20K. I have to go through my returns and explain the $20K was for my customers purchase of computers, under a separate line in my return, and with COGS. I advise my customer to issue a revise 1099 reducing the compensation amount by $20K.  Just to add, the customer should not have 1099 me to start with as I was an S Corp. But then, his bookkeeper was an idiot.

I agree. Its just a headache for the average citizen and no real consistency in why they make us 1099 an individual versus an LLC or Corporation. Are they telling us that corporations don't cheat on their taxes? Come on! :-)

When I leave a tip for a waiter/waitress, I'm not 1099'ng them even if I leave over 500 tips in any one year.  Why is that? 

Understand I'm being a bit of a smart alec on this. But at some point, I do believe that its simply not my job to help the irs collect money from people - not if it requires me to do work for them.

I'm reporting the payments. If they want my cpa to add them up and report them on some form, I'm fine with that. But I shouldn't have to get all their personal info to do it. That just exposes me to claims for identify theft and the like should that person ever get hit with identity theft.

I don't want anyone's social EVER nor should I be required to get it!

You don't have to issue 1099 only to Inc.(incorporated) form of companies, which are Home Depot, LOWEs etc

LLC - it's a limited liability company, not corporation. You have to issue 1099 to LLC as well as individual solo proprietor.

This is not a matter of logic but following the rules....even if the rules don't make sense. If you don't, you pay. That simple :))

When you're speeding 35 mPh at 25 zone, you get a ticket. Not because it's dangerous but because you are breaking the rules. 

Same here.

If you pay random babysitter more than $600/year, you issue W-9. Same goes with any service - if one particular waitress got more than $600 per year and you keep records - well, serve her W-9 :)))) ask for her SSN.....I bet she will like it.

One of the reason I create LLC is to give my tax ID rather than personal SSN.

There are plenty of regulations hard to comply with. That's why CPA makes good money, real estate agents, attorneys. If we could just do business and don't do any paperwork, wouldn't it be nice?!?

Originally posted by @Frank Palomino :

@Chinmay J. my understanding is that unless you're a "real estate professional" you may forego the reporting requirements. However, I consider it best practice to issue them. They're easy to file and you can do it yourself. If you're not comfortable doing it, your CPA can get it done at a minimal cost.

Wrong, there is not an exemption for real estate professional.

To clarify, you must give all individuals or LLCs you pay over $600 a 1099.  This would be your contract labor and may also be your CPA.  You do not have to issue them to corporations.  If you are thinking of going the tax evasion route of having them setup corps you may also want to know that a corporation is required to file a corporate return every year and their are $195 per month late filing penalties that will apply to missed or late returns.  Payments have to be made to the corporation so you will need a separate bank account, employer ID number, etc.  These all add to your risk.

I know of one person who was caught without 1099s.  He paid everyone in CASH (not check) so there was no way to verify his costs and all of this labor deductions were thrown out.  Outside of this instance, in 10 years I have not heard of a client or business getting in trouble for missed 1099s.  There is a per 1099 penalty but that would be minimal in comparison to the the missed deduction if they can't verify an expense.

You should issue 1099s, in the beginning it may be "ok" to play dumb but anyone who plans on being in business for the long haul should get their operations in order to comply with laws and regulation.

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