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CONTRACTOR EXPENSES RECEIPTS 1099 HOW TO
CONTRACTOR EXPENSES RECEIPTS 1099 VERIFICATION
CONTRACTOR EXPENSES RECEIPTS 1099 CODE

Solution: What to do if your IRS auditor will not budge.That’s wrong – you can comply with Rule 1 and be entitled to the deduction not complying with Rule 2 is a $100 penalty per Form 1099. Rule 2 is pretty important, so IRS auditors like to wrap it into Rule 1. Not following Rule 2 has its own result: Under Section 6721 of the Internal Revenue Code, the IRS can charge you $100 for every person for whom you did not send a Form 1099. This is an essential tool to enforce compliance with our tax laws.īut it is not in any way tied to your entitlement to write-off the expense on your tax return. If it appears the income was not reported, or if a tax return was not filed, the IRS could write to your subcontractor to collect the taxes not paid on the income. The IRS takes the Form 1099 you send them, and makes a computer match to your contractor’s tax return. The IRS – justifiably so – wants to know how much your subcontractor was paid, and whether your subcontractor reported the income on his tax return.

CONTRACTOR EXPENSES RECEIPTS 1099 CODE

Section 6041 of the Internal Revenue Code requires a business that pays more than $600 to a subconcrator to send the IRS a Form 1099-MISC reporting the amount paid. Remember, proving an expense under tax code Section 162 does not require the sending of a Form 1099. They are both important, but they are two different things. That’s right – Rule 1 is about your ability to prove your expense Rule 2 is about the IRS tax enforcement to your contractors.

Rule 2: Sending a Form 1099 to the IRS so they can cross-check that your contractor reported the payment on his tax return.

Proof can be direct (a check) or indirect (recreating what you did and who you paid). You just need to prove you paid the expense in the operation of your business. Nothing in Section 162 or Cohan requires a Form 1099 to be issued for a subcontractor labor expense to be deducted. So proving the expense was paid (as required by Section 162 of the Internal Revenue Code) can be by check, or not. IRS auditors do not like indirect evidence. Direct evidence is better, but indirect evidence is allowable and permissable. In other words, you can have direct evidence of the expense (your check with the notation in the memo portion proving the expense), or indirect evidence (recreating how many contractors the job entailed, how many hours they worked, and what their hourly wage was). Tax Court – allows you to recreate evidence to prove an expense. 1930).Ĭohan – which is followed both by the IRS and the U.S. These are evidentiary problems, but they are solved by application of the case of Cohan v. A check to the contractor proves the payment (it is best if the check has a notation in the memo portion, notated along the lines of “labor for Smith job,” but that’s not absolutely necessary, just good practice for the future.)Īnd it’s even okay if you paid in cash, not by check.

In the case of subcontractor labor, you would need to show the IRS auditor that the work the contractor performed was done in the ordinary course of your business and was necessary to it, and then prove that you paid the contractor. Section 162 of the Internal Revenue Code allows a deduction for ordinary and necessary business expenses that are paid or incurred during a year.

Rule 1: Proving that the expense was a necessary part of your business, and that you paid it.

CONTRACTOR EXPENSES RECEIPTS 1099 HOW TO

Here are the rules, what they mean, and how to navigate the audit to get your expenses allowed: The IRS auditor is confusing two separate rules. Huh? Is that possible, it seems so unfair. The tax you would owe if your subcontractor labor expense is disallowed would be staggering.īut you paid the expense, and can prove it. Your subcontractor labor can be a pretty significant amount, maybe your largest expense. No problem, right?īut the IRS auditor says you cannot deduct an expense if you did not send out Form 1099.

CONTRACTOR EXPENSES RECEIPTS 1099 VERIFICATION

You get audited, the IRS requests verification of the labor expense, and you provide the auditor with copies of your checks verifying the payment. You paid your subcontractors, but did not send them a Form 1099 for the payments.