Of course. Cash is still legal tender. You just need to document so you have a record the expense. As Wayne said, don't forget to submit your 1099's...
Of course. Cash is still legal tender. You just need to document so you have a record the expense. As Wayne said, don't forget to submit your 1099's...
Excuse my ignorance, but what happens if a 1099 isn't submitted?
Raleigh, NC · Member since 2019 · 62 posts · 30 votes
5y
I'm an aspiring investor so take all of this with a grain of salt, but here are my notes from J Scotts "The Book on Flipping Houses" regarding forms that you should get a contractor to sign. I think you can get them to sign a W-9 or a 1099 but he only mentions a W-9 in the book and I'm not sure which situation calls for one vs the other.
W-9. IRS form used to collect information about contractor to issue tax forms. Without it, you risk not getting in contact with contractor at end of year and have no proof of independent contractor relationship. May have to pay his payroll taxes! Fill out prior to handing contractor his first check.
Independent contractor agreement. Contractual relationship between you and the contractor. Contains details of project at hand. Says you don’t have employer/ employee relationship. Important on both legal and tax perspective. Lists: tasks to be performed. Compensation terms. Terms around who provides tools, materials, etc. Penalties for missing deadlines. Insurance obligations. Descriptions of how to change orders are done.
Scope of work. This may be part of ^. The more specific the SOW, the more likely the contractor will live up to expectations. If you have to go to court the judge will want to see SOW.
Payment schedule. May be part of independent contractor agreement as well. Clearly defined milestones contractor must head to get paid and how much. Possible milestones: 10% paid when contract is signed. 20% after first day of work is successfully completed. 30% paid after first half of work is completed. 30% paid after substantial completion of project. 10% paid two weeks after substantial completion of project. .. After completing multiple projects with contractor, make a payment schedule simpler.
Insurance and indemnification agreement. Used to prove that contractor provides a reasonable amount of insurance. Both liability and workers comp for himself and any subcontractors/employees/agents. Contractor can’t sue you for any actions he or his crew might take. Many people won’t use this, but one lawsuit will possibly wipe out your business and savings.
Lien waiver. Contractor signs at end of job saying he has been paid everything due to them. Make sure to obtain lien waiver before final payment is given, especially if you have bad relationship with contractor.
Other documents. Proof of license proof of insurance, proof of Workmen’s Comp. insurance, references.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
5y
@Nathaniel J Mott sure, thats all the major elements of forming a contract and getting the necessary accounting/tax stuff in place. Half of that you would have with a decent contractor, anyway.
@Padric Lynch First, perhaps you need to Google what the 1099 form is for... Really no point re-iterating it here. If you don't and the IRS catches up with you, they can levy pretty heft fines for you not filing it. The fines are per missing 1099 and accrue interest since the date it was due.
Mostly obviously, the contractor is requesting cash because they are most likely trying to do it off the books to save taxes, and hopefully giving you a discount. Of course, consult a qualified professional. Of course, you can't pay cash to avoid taxes.. You certainly can't pay cash to keep it "off the books" and still use it as a deduction on your tax return since the transaction is supposed to be "off the books." If you are going to cheat the system, you either can't have it both ways or just cheat the hell out of it...
Of course, I'm not advocating that you violate any Federal, State, local, etc. laws.
Of course. Cash is still legal tender. You just need to document so you have a record the expense. As Wayne said, don't forget to submit your 1099's...
Excuse my ignorance, but what happens if a 1099 isn't submitted?
The IRS will reward you by letting you pay your contractors taxes plus fines, since you participated in their tax evasion scheme.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
5y
You need to request a W9 prior to paying your contractor. A W9 gives you the necessary information to send them a 1099. A 1099 is how the government makes sure they pay taxes. A 1099 is required for payments by check too.
You will need proof to substantiate cash transactions. You will want these three things:
1. Invoice (describing charges)
2. Receipt (confirming cash payment of invoice)
3. 1099 (reporting to the IRS)
4. Not necessary, but it is good if there is an entry in your bank account showing withdrawal of the cash. Good bookkeeping practice.
Odds are good this contractor is asking for cash as a means of tax evasion and you would be smart to not participate. The IRS spends a lot of time going after these type of crimes, because it is the source of massive revenue loss for the government. You don't want to mess with the IRS and cash transactions are a way to get their attention quickly.
Also from a business standpoint, it is best to pay with a check as documentation of payment. The contractor could later claim you never paid them. If you didn't have a receipt or any proof you paid with cash, they could put a lien on your property.
Many reasons why no, and they were already mentioned on this thread. Mainly, your contractor intends to cheat on his taxes, and you will be helping him. Unless he completes Form W-9 and provides his valid SSN, which he won't, so you won't be able to issue him a 1099. You will probably end up breaking two Federal laws: labor/immigration laws (as he may not be authorized to legally work here) and tax laws.
You're unlikely to be caught, but you might, and then you face various risks of extra taxes, penalties etc.
If you insist on taking this risk, then your best practice for self-protection is to have a simple written and SIGNED contract: you do this, and I pay you this. Then have him acknowledge on the same piece of paper the receipt of the money.
Taxes are not the only reason to have things written and signed. He can later claim that he did not receive this money from you and demand a second payment - either because he is a crook or because he got drunk/high on your money and forgot he got paid (ask me how I know). He can even try to place a lien against you.
Think about it this way. He ain't scared of the IRS. Would he be scared of you?
If he accepts Zelle or PayPal or check - you're better protected, but he probably won't.
Bristol, TN · Member since 2019 · 32 posts · 7 votes
5y
Wow, I'm ashamed to admit this but I hadn't even thought about that as I'm going through plans to flip my first property. Thank you all for your responses.
Rental Property Investor · Columbus, OH · Member since 2018 · 42 posts · 29 votes
5y
@Padric Lynch
I was told by my tax person that I could write off cash payments of $600 or less without issuing a 1099. The tax rules maybe different for your area or your situation, so definitely check with a qualified tax accountant.
You might consider offering to pay for the materials directly and only pay the contractor for labor to lower your overall cash payment to him/her. Then you can write off the materials and labor separately.
Keep in mind in a LOT of jurisdictions you CAN legally marry your first cousin and reproduce like rabbits. ... so often “can I?” isn’t question you should be asking.
I was told by my tax person that I could write off cash payments of $600 or less without issuing a 1099. The tax rules maybe different for your area or your situation, so definitely check with a qualified tax accountant.
You (or your accountant) are mixing up two different laws. You can pay to any contractor an amount less than $600 per year (not per job) without issuing them a 1099 form. Cash, check, barter, etc., doesn’t matter
You can deduct ANY amount of cash or other type of payments (not just $600), as long as you can show proper documentation (invoice, receipt, etc as mentioned above).
I have not collected my contractor's W-9. What do I do now?
Contact him in writing (include a blank form W9j and ask him to complete and return the form immediately. YOUR deadline for filing the 1099 (and the corresponding form 1096 to the IRS) is the end of January, so you don’t have much time. more than likely, he will not respond because he doesn’t want to report the income to the IRS. There are IRS rules you need to follow to escalate the process (I believe at some point you bring the IRS into the loop as well to “motivate” the contractor). You’ll need to look up the exact process, but there is quite a bit of work involved and the IRS can come after you if you don’t comply. Needless to say, the contractor will not be happy either... so this is why others have suggested you request the W2 form BEFORE you pay ( in fact, it is best to request and receive it before the work even starts!).
There are potentially huge fines that the IRS can hit you with for not doing this right. Unlikely that they will pursue you to the fullest extent of the law as a small landlord, but it Is possible.
I was told by my tax person that I could write off cash payments of $600 or less without issuing a 1099. The tax rules maybe different for your area or your situation, so definitely check with a qualified tax accountant.
You (or your accountant) are mixing up two different laws. You can pay to any contractor an amount less than $600 per year (not per job) without issuing them a 1099 form. Cash, check, barter, etc., doesn’t matter
You can deduct ANY amount of cash or other type of payments (not just $600), as long as you can show proper documentation (invoice, receipt, etc as mentioned above).
Exactly correct and be aware this is Federal Tax Law, so your location doesn't matter as long as you are in the USA.
Many reasons why no, and they were already mentioned on this thread. Mainly, your contractor intends to cheat on his taxes, and you will be helping him. Unless he completes Form W-9 and provides his valid SSN, which he won't, so you won't be able to issue him a 1099. You will probably end up breaking two Federal laws: labor/immigration laws (as he may not be authorized to legally work here) and tax laws.
You're unlikely to be caught, but you might, and then you face various risks of extra taxes, penalties etc.
If you insist on taking this risk, then your best practice for self-protection is to have a simple written and SIGNED contract: you do this, and I pay you this. Then have him acknowledge on the same piece of paper the receipt of the money.
Taxes are not the only reason to have things written and signed. He can later claim that he did not receive this money from you and demand a second payment - either because he is a crook or because he got drunk/high on your money and forgot he got paid (ask me how I know). He can even try to place a lien against you.
Think about it this way. He ain't scared of the IRS. Would he be scared of you?
If he accepts Zelle or PayPal or check - you're better protected, but he probably won't.
I read somewhere that if you pay contractors by credit card then you don't have to worry about W-9 or 1099. What about Zelle, PayPal, check? Thanks.
Rental Property Investor · DFW · Member since 2019 · 30 posts · 14 votes
5y
Was not the case that landlord do not need to submit 1099 as long as they are landlords (passive income) and not actively working the rental business (professional property manager)?
If you read/look at the 1099 form or instructions, it says in three places that credit card transactions don't count basically. My understanding is because the credit card companies have to send in a form, but I think their limit is $25k or something. So, the "idea" is the transaction will be reported to the IRS, although there is that gap.
I have no idea about Zelle or Paypal. Zelle probably wouldn't work as exception. Of course, a check would go towards triggering a 1099 filing.
Of course, consult a professional (who I think basically says file it anyway since its all computerized for them).
To my understanding, the 1099 is required for business to business payments. So, a landlord isn't considered to be operating an active business to the IRS which is why one doesn't normally file 1099.
Of course, consult a qualified professional. Good luck.