How to deduct labor expense with no EIN?

Question

So the majority of all of the contractors or people I hire to help at my rental I pay in cash because they don’t accept credit card or check and they don’t have an EIN. Another example is cleaning ladies and or painters.

Can I still deduct their labor cost on my taxes? I’ve recently started making them create receipts for me, but when reading IRS tax code it appears that if they don’t have an EIN I’m apparently out of luck

Can someone please opine on how they handle this?

Kevin DeVargas · Answer

Account Closed

Let me Disrupt this conversation between the three Mikes and share Kevin's experience with the scenario :)

Your entitled to deduct all expenses incurred regardless if they have SS or EIN number. I recommend purchasing a cash receipt book to keep track of cash transactions.

Last week I completed over 650 1099's, 500 of them did not have EIN or SS numbers. The client normally pays a fee of $50.00 per 1099 that does not have a tax ID. This practice also opens the doors to other types of audits, fines and penalties.

Please don't misinterpret, I do not condone this practice. Just sharing my experience.

Account Closed · Answer

Your Comment: "luckily for the Tucson Mike, this is not how the tax law works. You're entitled to deduct labor regardless of issuing 1099s"

Did not know and never assumed such. Was told I couldn't deduct my labor on a fix & flip and I conflated it with deducting other workers undocumented labor.  (Since he states he pays in cash)

Thanks for the correction.

Account Closed · Answer

Why would you get a tax break if they aren't paying taxes? You get cheaper labor because they aren't paying taxes, so thusly the government assumes that is enough benefit to you to not give you a tax break on top of it.

It also means that the guy who does pay his taxes, does have insurance, does have a bond, does have a license will cost you more to hire (he has to pay for those expenses somehow and that means he charges more) not to mention you have greater protection from someone who is licensed, bonded and insured and pays his taxes. The government incentivizes you to hire them by you being able to deduct their work. Typically these are the people who are here legally and following the law. The others are typically not here legally or at best choose not following the law.

It's pretty simple really.

You get one or the other, can't have both.

Mike M. · Answer

@Kevin DeVargas

Hi Kevin (and all Mike’s) how does the cash receipt book work? Do we both essentially sign that I paid them for services rendered- So I keep a copy?

And in terms of the 1099 - do I need to be providing these to a handyman every time they complete work? Seems time consuming and or may lead to confusion on their end.

Thanks everyone

Michael Plaks · Answer

Let me jump in between two Arizona Mike Ms - maybe I can make a wish or something from such rare coincidence, especially since I'm yet another Mike myself, albeit from Texas.

The Paradise Valley Mike makes a good argument on behalf of the IRS, but luckily for the Tucson Mike, this is not how the tax law works. You're entitled to deduct labor regardless of issuing 1099s. The IRS does want you to file 1099s, and they specifically ask you on the tax forms whether or not you did. During an IRS audit, they may raise this issue, because it is legally your responsibility. You may have to pay penalties for not issuing 1099s. However, the 1099 reporting requirement is separate from the right to deduct labor costs.

If audited, you would have to prove that you actually made these payments, so receipts and good records are very important. Avoid cash if you can.

All of that said, the Paradise Valley Mike describes what good business practices should be. Hiring cheap illegal labor can backfire in many ways: IRS scrutiny, dealing with immigration authorities, exposure to legal liability for injuries and accidents and generally low quality of work. Sometimes, it ends up costing more.