A potential client (self employed) asked if he could 1099 me for a portion of a project we are planning………..yeah, like half??
That takes it way over my labor portion of the project. I informed him of that and he understood. But I am not comfortable with even the fact that he asked.
I don’t want to blow the deal enteirely, but this is a little unsettling to me. Kinda sets a tone of him wanting to get over, and over again.
This is on a 40k Master Bath remodel.
Whaddya think??
Thanks Eric
Every once in a while, something goes right!
Replies
I don't understand where the issue is. Whether he gives you a 1099 or not you still pay the same amount of taxes, right?
Jon Blakemore
Have you given him your Taxpayer Indentification Number (TIN)? Do you intend to pay income taxes on your "wages" for this?
Do you know that if he requests your TIN and you don't give it to him, he is required to withhold something like 30 percent of your payouts, and then turn around and pay it to the IRS?
How about this. He pays you the $40K, doesn't 1099 you, you don't report it, the IRS comes after both you and him for the money you owe, and it will include huge penalties and interest. Maybe he doesn't think you'll settle your tax bill, and cannot afford to be hit.
Are you willing to offer him a better deal in exchange for him paying you under the table? Do you want all us "Breaktime" strangers to know you are working this way?
The IRS requires that he report payments to you, all of them, not just a part, on the 1099, regardless of how much is for labor and how much is for materials. The only exception is if you are incorporated. INC. That's it.
Edited 7/23/2004 10:27 pm ET by Bob Dylan
Is it possible that you are missing something here?
I dont think firebird is trying to get out of the taxes but does not want to be 1099'd for half of a project when he is not getting that much money in his pocket.
I may be wrong, but that's how I'm reading it.
Doug
If you get a 1099 for the price of a project that's no problem. When you fill out your schedule C you will enter your financial info for the year. If $20k of the project is material, then the COGS (Cost of good sold) is 20 and the income is 20. He will only pay taxes on his net profit.
Now if the guy wants to give him a 1099 of $50k on a project were Firebird's gross receipts are $40k, that's a problem.
Jon Blakemore
I'm with you on that Jon, just not sure how Eric meant it.
Doug
Actually if the person is paying Firebird as an individual rather than for that persons business then there is no requirement for that person to generate a 1099.
And re-imbursable expenses can be included or not include in 1099. It depends on the details, but one must have good paper work in either case or else they will either over or underpay taxes.
For example if the contract is for $10k to provide and install shelving in a store (1099 reportable vs doing a similar project in their home). The the 1099 would be for $10k.
But if the contract for $5k to install shelves and the client will re-imburse him for the material then the 1099 can be either way.
But I don't recommend it. It is commonly done for things like travel expenses.
But for things like this like this I don't recommend it. Becomes too messy. Then if you have a mark up on the material that makes it more confusing.
Just get the total and then include your cost of material and other expense on sch C.
and Jon,
I always thought that a 1099 was to be used for reporting WAGES.
Money I am collecting from my client to purchase materials or pay subs is not wages is it?
Dave, from what you are telling me, every time one of us works for a homeowner, they are required to report (to irs) sums paid to us and also incurr liability if we don't pay our taxes??? That's incredible, and big news to me.
About being under the table, this was about him being under the table or so I thought. As the project would qualify as a capital improvement, isn't he allready getting his break by not being required to pay income tax on the full amount of the project?? Now he wants to write it of as a bussiness expense as well.
So more details on my part probably would have helped. This was not about me avoiding taxes, but staying out of trouble, and reading a little in to his motivation for asking me to do this, as it relates to the relationship we are about to enter.
Read on........
Thanks,
EricEvery once in a while, something goes right!
"I always thought that a 1099 was to be used for reporting WAGES."
WRONG, WRONG, WRONG!!!!
If you are getting wages then you are an independent contractor and should be treated as an employee and getting a W-2. That is reguardless if this is from an individual or a business enity.
"Money I am collecting from my client to purchase materials or pay subs is not wages is it?"
No it is not wages. But at the same time it might be income to your sole propritorship buisness. If you invoice separately and get separte payments then they don't have to be included.
But it really makes life difficult on both ends.
IF you are operating a business then you are providing an end product or service, just just hours of labor.
For example if you are in business you would contract for $7500 to build a deck. You would show as income on sch C that 7500 whether you get a 1099 or not.
Then you would list as expenses the $2500 in lumber, the $250 in hardware, the $250 you paid an electrican as a sub to move an outlet. Aslo you would have other expenses such as blade, cell phone, vechicle (but understand the what are buisness and what are personal expenses), advertising, and other overhead expenses that are not directly related to this project.
And as A BUSINESS if you pay the electrican more than $600 TOTAL OVER THE YEAR you need to send him a 1099.
As a home owner, in your personal home, you could pay him $5,000 for electrical work and not send him a 1099.
"Dave, from what you are telling me, every time one of us works for a homeowner, they are required to report (to irs) sums paid to us and also incurr liability if we don't pay our taxes??? That's incredible, and big news to me."
COMPLETELY FALSE.
First ONLY BUSINESS enities need to send out 1099's. And if the 1099's are not send out the business can be penalized for not sending them. But they are not liable for other persons taxes (unless that other person is liable for backup withholding which is a whole different area).
However, they can be liable for part of the taxes if your are not an independent contractor, but rather an employee and that is true for personal or business.
Extreme cases 1) first you are contracted for $7500 to built an 15x20 deck with trex decking. The person/business that made that contract with you has zero liability for any taxes that you might not pay. And for a practical matter they have no way of know what you would owe. You might have miss figured and ended up paying $8000 for material.
2) The HO buys the lumber, decking, hardware. Has plans indicating the location of the footings, size and spacing of the joists, the number of lag bolts to go in the ledger, etc, etc and they agree to pay you $20 an hire to construct the deck using there design, spec and material. Then you are an employee. Even if they issue an 1099 it does not matter. IF found out they can be liable for taxes that they should have withheld from you and remitted to the IRS as you are an emplouee
Here are the IRS instruction for the 1099-MISC.
http://www.irs.gov/pub/irs-pdf/i1099msc.pdf
"Trade or business reporting only. Report on Form 1099-MISC.
1099-MISC only when payments are made in the course of your
trade or business. Personal payments are not reportable. You
are engaged in a trade or business if you operate for gain or connected with the Federal government, and an organization
profit."
You really need to learn some more of the basics of this, not only for taxes, but also to set up your books so you know if what expenses you hae and if you are making a profit or not.
Several courses of action. You can start with the IRS has a publication on taxes for small business. You can get with high school adult ed and community colledge continuing ed departments. They have course on account and taxes for small businesses.
And you can "rent" an account for a couple of years. This is the perfect time of year to do it. Have the go over the sch C and show what does where and why. This might lead you to having them do your taxes or other services through out the year.
And if you pay the account over $600 you will need to send him a 1099 as this is a BUSINESS EXPENSE.
Now I have no idea what your clients idea about wanting to put 1/2 on 1099 and have off.
Most likely hood he has no idea what a 1099 is or who has to provide one and under what circumstances.
One possiblility is that this is due use property, such as office in home and the expense are being proportioned between the personal use and the business use.
Even if this is true I don't think that splitting the 1099 is the way to handle it. That is really his problem and all of it should be on the 1099 and he proportions it on his books. But that is only a guess about the right way to handle that.
Bill,
Thanks for the detailed reply, that was very kind of you.
I 'get' (I think) most of the tax and business issues about being s/e. What I don't I will leave to the experts, such as yourself apparently.
This was the first time an ho has suggested this and it threw me. I think Mikes comment and my concern about him 1099ing me for services I performed for his business when that is not what I am doing is the proverbial Red Flag.
I am doing a bathroom in their full time residence; he wants to 1099 for providing a service to his head hunting business.
I believe that you are correct when you suggest that he does not understand the rules and use of a 1099.
Was I correct though in stating that the money spent on this capital improvement to their principle residence is tax deductable? I beleive he is just trying to have things both ways, he will in essence have the deduction work twice for him, or maybe once for his wife and once for his headhunter business.
I obviously can only provide him with an invoice for the work I did. If I were to accept from him a 1099 for a "commission" then I would be colluding with him to break the law. Why would I want that? If he and his wife file seperately, she writes off the project as the ho, he writes it off (w/1099) as a commission they could probably save 20k or so on their taxes collectively? So they are asking the rest of the taxpayers to underwrite their Master Bath Remodel.
I don't understand why people want to complicate thigs like this, I like to sleep at night.
Thanks again,
Eric
Every once in a while, something goes right!
Edited 7/24/2004 1:06 pm ET by firebird
"Was I correct though in stating that the money spent on this capital improvement to their principle residence is tax deductable?"
No capital improvement on neither business or personal realestate are deductable.
On a personal presidence they do add to the cost basis and would reduce any capital gains on sale. But with the current exclusions most people don't pay any capital gains on the sale of their residence anyway. But if the property is coverted to business use or rental then those capital improvement become part of the cost basis from which the property is depreciated.
For captial improvement on business property again the the expense is added to cost basis. But then it is depreciated over the years. The depreciation expense are deductable and they reduce the cost basis each year by the amount of depreciation.
The capital improvements aren't reported to government (federal) and it is up to the HO/business man to keep copies of invoices and the like to show there cost.
A 1099 really does not show anything for that purpose. It could have been iussed for many reasons.
"I obviously can only provide him with an invoice for the work I did. If I were to accept from him a 1099 for a "commission" then I would be colluding with him to break the law. Why would I want that? If he and his wife file seperately, she writes off the project as the ho, he writes it off (w/1099) as a commission they could probably save 20k or so on their taxes collectively? So they are asking the rest of the taxpayers to underwrite their Master Bath Remodel."
I think that is what is going on. He wants to fudge his books to some part of it as a business expense so that it reduces the profit and thus taxes (and specially SE taxes) for the business.
This on a small scale is what leaders of Tyco and Adelpia and some other companies have gotten into trouble over. Writing off person expenses as business expesnes.
Damn you're good..........hire that man!
Thanks so much Bill, you are a well of knowledge. Are you an accountant?
EricEvery once in a while, something goes right!
Well this has certainly become very interesting to say the least! Thanks for all the thoughts and advice from everyone.
This situation has put a pin point VERY close to my bubble, and I am VERY disturbed.
This couple has been a long time client of my wife. She is a massage therapist and they have had a long standing GOOD relationship. I initially met with her, then with them both. His biggest concern, and he could not have put a finer point on it, was the security of their home and cleanliness, both of which I am very proactive about. See, they are in Fla. for the summer, and they want me to do the job in their absence. I pretty much sold them the job at that meeting, only mistake I made was not leaving with a check in my hand.
This guy was obsessed that their home would be secure and kept clean. I even wrote in the proposal that I could elect to have the entire house cleaned using their housekeeper at my sole expense. Why then would you try to negotiate the price of this project......what; you DON"T want me to keep the house as clean as I promised, or you WANT me to forget to set the alarm one nite while leaving?
I simply don't get what motivates people to do certain things. A very strange species us humans...........
Thanks again everyone..........be sure to visit my new thread in Business, titled Negotiating $.
EricEvery once in a while, something goes right!
You know after reading all this if I were in your shoes I might re-think dealing with these folks. Kind of an obvious conclusion and I am not trying to dictate here but the guy wants you to phony up the payment and chisel your price. I don't know........DanT
I would echo DanT's concern.
This guy could be upstanding and, in a moment of weakness, be having an ethical lapse. OTOH, he could be a grinder and this is just a taste of what is to come. If you do take the job, watch your back and make sure your I's and T's are in order.
I can't understand why some contractors can feel comfortable "bending" the rules. It seems to me that once you crack open the door, you are risking your future with the client and any referrals.
Like Mike said, "we can't do business that way". Case closed.
Jon Blakemore
Hey bud don't sweat it,if you are "over charged"on a 1099 you can submit your own to correct erroneous reports just find the right classification if any on the form , most of us think of this form as other labor but you can level out these problems with this also. It may be you will need 1099 b or c or some animal like that...
I'd give a resounding NO.
we already have a contract ...
let his accountant figure that into the greater scheme of things ...
something fishy's going on here .. or he wants something fishy to go on ...
Jeff
Buck Construction, llc Pittsburgh,PA
Artistry in Carpentry
something fishy's going on here .. or he wants something fishy to go on ...
That was my point or what I wanted opinions on. More details..........
I am close to having a contract with this person. I delivered to him a quote with no specs. (by email, they are in fla, i'm in ny, jobs in ny)) the morning I was going out the door for a few days off. I told him I would not be able to provide a proposal before I left, but would extend him the courtesy of a number before I left to give him and the mrs. a heads up. They write back and accept my quote.
Week goes by, deliver proposal specifications, play phone tag, can you sharpen your pencil a little? Then the 1099 thing. He is a headhunter. So I suggest to him that if he is going to 1099 me for services I provided to his business, then likely if the IRS asks, these services should be for something related to his buss. correct?? He tells me it would be my commission for finding him a head that he was looking for.
Just makes me a little uncomfortable. After all, hasn't he already gotten his deduction on the cost of the project?? Now he wants to deduct it again as a business expense?
My labor is actually around 17k, the total project comes in around 38. You can tell I deal with 1099's alot. I've only received them as a sub in the past, and then for labor only. If there were materials involved, they went on the GC's house account or I was reimbursed under seperate cover for those expences.
And going back to Bob's post, is it common for any of you to receive 1099 from your ho clients?? I never have, and never heard of it happening.
Thanks for all of the information.
Eric
Every once in a while, something goes right!
Edited 7/24/2004 9:25 am ET by firebird
If we were more to date in our business, we'd 1099 all subs. The last GC I worked for 1099'd everyone not incorporated. They had a subcontractor info form to determine business type etc., and then kept on file. What if the IRS questions a $4500 check to "Joe X" when it's really payment for roofing labor? We're having a hard enough time keeping our job costing up right now though.
remodeler
I receive 1099's from some of my commercial clients, a few restaurants and property management groups. I've never received one from an HO tho...except when the county was providing a low interest loan for a home owner's sewer upgrade, in that case, I received the 1099 directly from the county.
Like someone mentioned earlier, the 1099's are the totals of what I've received, but the cost of goods sold makes sure I'm not paying taxes on materials and subs come tax time.
firebird.... one of those ethical delimas we are all faced with again and again..
my stock answer has become.... "sorry, i can't do business that way"..
if they want to pay cash.. i tell them that's fine with me , i'm still going to report the income..
if they want to 1099 me, that's fine ( even before i incorporated).. just so long as it's for the total amount of the payments i received..
in this case , he wants you to collude with him in defrauding the US Govt. by paying you a commission for recruiting for his headhunting business.. a service you never provided...
if you agree, you become his partner in crime.. how many partners do you need ?
i would politely tell him that i don't do business that way and would be glad to execute my contract for the terms and amounts specified..
once a customer knows you will bend the law in one area.. you become open game for them to bend the laws and behaviors in other areas...
you should try to conduct your business as if you were Caesar's wife.. above reproach...so should your customer, for that matter
do i slip up now and then ?.. of course.. but i always try to hew to the straight and narrow....
guess what.. the people you want for customers will come to know and understand that and it will pay dividends in the futureMike Smith Rhode Island : Design / Build / Repair / Restore
so he wants to commit a tax fraud and wants you as a partner... which means that you are doing the same not just penalty and interest anymore, talking arrest, legal fees and maybe worse if he wants to be an entrepreneur, let him do it on his own dime firebird, don't get sucked in
He tells me it would be my commission for finding him a head that he was looking for.
So he wants to have you improve his residence, then pay you a commission as if you located an employee for his business? Sounds sleazy to me. Time to walk away. Or get him to put the deal in writing and then call the IRS as a whistleblower.
Whenever you are asked if you can do a job, tell'em "Certainly, I can!" Then get busy and find out how to do it. T. Roosevelt