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

Tax, SDIRAs & Cost Segregation
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W-9s & 1099s: How do I pay contractors "under the table"?

Carlo Michelotti
Real Estate Investor · Rochelle, IL · Member since 2015 · 10 posts · 4 votes

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?

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Nathan GesnerBusiness Member
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
8y

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.

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  • Steve Armstrong
    Investor · Prospect, KY · Member since 2017 · 62 posts · 34 votes
    8y

    This is not tax advice, but 26 CFR 1.6041-1 (CFR - Code of Federal Regulations) requires a 1099 on payments $600.00 or above.   See https://www.law.cornell.edu/cfr/text/26/1.6041-1

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  • Eddie T.
    Rental Property Investor · NY · Member since 2013 · 844 posts · 350 votes
    8y

    @Linda Weygant If my contractor fills out a W-9 and then scans and email me a copy is that ok or do I need to have a physical hard signed W-9?

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  • Justin B.
    Investor · Gaithersburg, MD · Member since 2013 · 659 posts · 441 votes
    8y

    This one is way too easy.  NEVER do anything illegal.  If the law/IRS says to submit a 1099, do it.  If that means your rates go up 20%, so be it.  Cross the IRS and it's suicide for your business.  It's never worth it.

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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    8y
    Originally posted by @Eddie T.:

    @Linda Weygant If my contractor fills out a W-9 and then scans and email me a copy is that ok or do I need to have a physical hard signed W-9?

    A scan is fine. 

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  • Ron Quinn
    Specialist · Independence, MO · Member since 2016 · 66 posts · 9 votes
    8y

    I am a contractor, I give a w9 to all clients that pay my company money then report all amounts collected from all clients and my CPA handles it from there. What I report someone paid should match the amounts the client claims they paid out to my company. Any person not reporting all amounts paid is asking for trouble with the IRS. This was the only way I seemed to protect my company from under/over reportings, no 10-99s being issued from clients, etc. 

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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    7y

    I just wanted to bump this whole discussion to the top again because I'm seeing this frequently in my clients this year.

    The new Section 199A deduction (20% reduction in Business income) is here and with it this cool new tidbit.

    Your rental (yes yours!!!) very likely qualifies for this new Deduction IF your rental enterprise rises to the level of a trade or business?  How do you know if it does or not?  Simple, do you treat it like a business?   (never mind passive rules for a minute)

    What are some facts and circumstances as to whether or not your rental is a Trade or Business?

    1.  Did you enter into the venture with a profit motive?

    2.  Do you manage the enterprise yourself and/or engage a professional manager that you then manage?

    3.  Do you - and this is the kicker, ladies and gentlemen - ISSUE 1099s to YOUR SUBCONTRACTORS?

    If you can answer yes to all of these questions, then congratulations.  You can shave 20% of your profits off of your taxes before you calculate.

    (There are nuances and details I'm not getting into here... talk to your own CPA about whether or not your rental qualifies).

    Now queue all those people who were fine with not issuing 1099s creating a stampeded to somebody who can help them prepare 1099s so they can qualify for that 20% deduction.

    It may not have been enough to threaten you with penalties in the past, but take away your 20% deduction and I'm guessing a whole lot of you will be frothing at the mouth to get them issued.

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