Paying Contractors

15 Replies

Do you guys 1099 your workers? I have been paying cash to my workers and im startign to get worried come tax time.. anyone else have some advice regarding this? I track expenses  in an excel sheet but im not sure if the IRS can come after me and how I can prove i actually spent the money.... 

That is tricky!!!  

1099s should be issued for anything over $700 ( I think that is the correct number)

I would have a subcontractor agreement with anyone that you use regularly, and job contracts are also helpful, otherwise, they could be considered an employee, and then you have payroll taxes, and workers comp to deal with, not to mention the liability!!!!

If you ever were to get audited, the more documentation the better!!!!!!

Unlikely the IRS would accept deductions for cash payments made without, at least, an Independent Contractors Agreement and a receipt. 

Originally posted by @Charles Socci :

That is tricky!!!  

1099s should be issued for anything over $700 ( I think that is the correct number)

I would have a subcontractor agreement with anyone that you use regularly, and job contracts are also helpful, otherwise, they could be considered an employee, and then you have payroll taxes, and workers comp to deal with, not to mention the liability!!!!

If you ever were to get audited, the more documentation the better!!!!!!

 So let's say you're just doing renovations on your own home that you occupy as the owner where title is held in your personal name. Do you have to issue 1099's for this kind of thing or only if you are operating as a business?

Originally posted by @J Scott:

Unlikely the IRS would accept deductions for cash payments made without, at least, an Independent Contractors Agreement and a receipt. 

Are deductions the only purpose of issuing the 1099 or is it a requirement regardless, which if skipped could land you in trouble?

@Patricio P. while I don't know about the "Independent Contractors Agreement", I asked the question to my CPA since I wanted to have some work done. He said that I should issue 1099s to any contractor for work over the amount of $600. This was last year so I don't know if that amount changes. This came from wanting to hire painters for painting the interior/exterior and doing lite remodels. Those amounts are well above the $600 figure. In my conversation with him he said that the 1099 was to show I paid the contractor that will have to report the proceeds as income. Seems like it's just a way for the IRS to make sure contractors report income if that's the case. But also want to write off all my expenses so....

@Patricio P. @Jassem A. @Roy Lhanie

@Daria B. is correct here. If you are a landlord, you should issue 1099s to all contractors you engage. A 1099 is an informational return submitted to the contractor and IRS that (1) helps you substantiate deductions and (2) ensures that the contractor is not underreporting income. Additionally, since you need a contractor's W9 or SSN to issue him/her a 1099, you can have some assurance that the contractor is ethical and operating a real business.

A 1099 is issued by anyone engaging in an active trade or business. Even though real estate income is considered "passive" it is still relatively easy to qualify the business as an active trade or business. Landlording will generally be considered an active trade or business.

Investing in an LLC in which another person operates the day-to-day activities and makes management decisions is considered a passive business activity. In this case, you as the passive investor would not be required to file a 1099.

The law can be confusing, especially with conflicting court cases, but better to be safe and issue the 1099 than be penalized on the back end (hefty fines can result from not issuing a 1099).

I recommend using https://www.track1099.com/info/pricing (no affiliation).

@Brandon Hall for clarification:

In the past I hired a contractor to remodel 2 bathrooms in my rental. At the time I was not aware of the 1099 for contractor work. This contractor actually replaced interior/exterior doors in my primary residence via Home Depot. They did such a great job I called them directly to do my rental bath remodel. I "did not" issue a 1099 to them but they are licensed and bonded and while I believe they would not have a problem filling out a W9, I was not as educated as I am now so I did not get one.

In that case I "should" have issued a 1099 for the final completed amount of the job they did that was well over $600.

I also contacted a local LLC company to remodel the kitchen and was still under the radar of knowledge so they too did not get a 1099 from me.

I think @Roy Lhanie initial question may be what I experienced and with @Patricio P. it is his own home so does the 1099 still apply.

I was under the impression that if the contractor you paid is a company name (rather than an individual person), you would not need to issue the 1099.

So, Home Improvements Corp. would not need a 1099. But Joe Smith would need a 1099 if you paid him $600 or more in the year.

*Edit-- well, here's a link with a brief description:
https://www.irs.gov/Businesses/Small-Businesses-&-...

@Daria B. you likely should have issued a 1099 but I'm not sure if it would be worth it to go back and issue one at this point.

@Patricio P. I seemed to have skimmed over the "on your own home" aspect. In this case it depends if your home is 100% occupied by you, and if so, are you making repairs to a home office? You do not have to issue a 1099 to contractors who perform work on your primary residence as it is a personal expense and not in connection with a trade or business. However if you are house hacking and get work done on common areas or the rental portion of your home, OR you have a home office used in your trade or business and have work done to it, you would need to issue a 1099.

**Edit** @Nicole W. (bummer that you can't tag people in edits) this is true, you do not need to issue a 1099 to corporations. Corporations include C and S-Corps, not LLCs. So if your contractor is operating out of an LLC or sole prop, issue the 1099. Great catch!

@Nicole W. thanks for highlighting this. Most of the contractors I see in this area are LLCs so that makes it easier to test whether or not to issue a 1099. And I hope that all the LLCs out there are understanding and willing to accept it, otherwise, it makes the journey to find contractors more challenging.

@Brandon Hall I know going forward that if I'm dealing with an individual or LLC, I need to issue one. So much to keep track of! :-)

Originally posted by @Patricio P. :
Originally posted by @J Scott:

Unlikely the IRS would accept deductions for cash payments made without, at least, an Independent Contractors Agreement and a receipt. 

Are deductions the only purpose of issuing the 1099 or is it a requirement regardless, which if skipped could land you in trouble?

 If you don't issue 1099, then you'll have to pay for THEIR taxes. Up to you.

Originally posted by @Roy Lhanie :

Do you guys 1099 your workers? I have been paying cash to my workers and im startign to get worried come tax time.. anyone else have some advice regarding this? I track expenses  in an excel sheet but im not sure if the IRS can come after me and how I can prove i actually spent the money.... 

 Workers or contractors? You won't run into problems, just don't declare them as expenses so you won't get a red flag, just pay the taxes on whatever's you paid, probably 34% of whatever is the sum, because it will raise your bracket and if you earned + spent cash more than 60k (or something) then you'll be on the 34% bracket.