# Tax question - Sole P. hiring a sub. contractor



## Canyonbc (Dec 10, 2007)

I run as a sole p. and have a question i will use a example to try and answer my question. 

Example.

So your a business, but just a one man show boat and run as a sole Proprietorship...you sub a job out and the subs services amount to $ 500 for the day. 

When it comes to taxes, how does this play out? What if anything do you categorize this under...???

I am not sure if what i am asking is clear in any situation...please let me know if its not. 

Thanks Canyon.


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## reachtreeservi (Dec 10, 2007)

As long as you issue the guy a 1099, you write the cost off on your taxes.
Contract Labor is part of operating expenses
If you don't Issue him a 1099, you pay the taxes.


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## Canyonbc (Dec 11, 2007)

reachtreeservi said:


> As long as you issue the guy a 1099, you write the cost off on your taxes.
> Contract Labor is part of operating expenses
> If you don't Issue him a 1099, you pay the taxes.



Thanks for the info. 

So to confirm. 

Lets say i sub out a climber over the next year and the invoices total $ 10,000...if i issue him a 1099, then i will not be taxed on that 10 grand???

Thanks again reachtreeservi, you have helped a ton. 

Canyon


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## reachtreeservi (Dec 11, 2007)

Canyonbc said:


> Thanks for the info.
> 
> So to confirm.
> 
> ...



Affirmative.
Something else, If you need unskilled groundies, brush draggers you can go thru temp companies, (labor ready, labor finders) and they supply the people and carry the workers comp insurance on them. Always go to the place and pick out who you want, or you won't believe what they'll send you. These places open really early (like 6am) get there early, the guys are lined up out side , size'um up , pick who you want and question them a little, then call the office when they open and tell'em you want so and so. If you find someone who's ok then you can get the same guy everytime. It's not the ideal solution, but sometimes you just need a warm body.... one last thing, you have to supply all PPE for these guys (chaps,helment ,safety glasses, gloves) and watch'em like a hawk!


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## Canyonbc (Dec 11, 2007)

reachtreeservi said:


> Affirmative.
> Something else, If you need unskilled groundies, brush draggers you can go thru temp companies, (labor ready, labor finders) and they supply the people and carry the workers comp insurance on them. Always go to the place and pick out who you want, or you won't believe what they'll send you. These places open really early (like 6am) get there early, the guys are lined up out side , size'um up , pick who you want and question them a little, then call the office when they open and tell'em you want so and so. If you find someone who's ok then you can get the same guy everytime. It's not the ideal solution, but sometimes you just need a warm body.... one last thing, you have to supply all PPE for these guys (chaps,helment ,safety glasses, gloves) and watch'em like a hawk!



Thanks again. 

I have seen there building buts never knew excatly what it was thanks for the info on it. It def. more legit the the mexicans lining up at the 7 - 11 in San Diego...and up here in Sonoma too...i dont no about other parts of the country but its a common thing here. 

I will def. look into that...and ya i can understand what you mean with PPE and watch them like a hawk. 

Do they have set prices??? or do you negiate??

Man it would be cool if you could stuff them with a 1099 too...just kidding.


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## Canyonbc (Dec 11, 2007)

P.S. I like your bottom quote there...not trying to change the thread.


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## reachtreeservi (Dec 11, 2007)

You write the cost of the temps off also. You set up an account and they send you a form at the end of the year. It's totally legit, differant services have differant prices but it's around 16.00-17.00 an hour around here. That's what the company charges you , they pay those guys maybe 7.00 an hour.
you can get there early and work your own deal with someone, they just leave with you and you pay them whatever you want, maybe 10.00-12.00 . The guys will do that all day long and be tickled pink.
But then you can't write it off and there's no workers comp.

It's worth the extra cash for the workers comp. insurance. These guys get hurt alot sometimes. Better to CYA !


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## trimmmed (Dec 11, 2007)

Canyonbc said:


> Lets say i sub out a climber over the next year and the invoices total $ 10,000...if i issue him a 1099, then i will not be taxed on that 10 grand???



You won't have any tax liability on that 10k but if he is not insured you would have to pay workmans comp on it.


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## Husky137 (Dec 11, 2007)

trimmmed said:


> You won't have any tax liability on that 10k but if he is not insured you would have to pay workmans comp on it.



Additionally, he has to be a legitimate sub. The sub should be carrying the proper insurances, fed tax id, all that jazz. If you are just calling him a sub to avoid these costs to yourslef then the government and insurance companies are going to consider him an employee.


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## lxt (Dec 11, 2007)

Husky137 said:


> Additionally, he has to be a legitimate sub. The sub should be carrying the proper insurances, fed tax id, all that jazz. If you are just calling him a sub to avoid these costs to yourslef then the government and insurance companies are going to consider him an employee.



Not true!! there is a misc. income exclusion, depends on your accountant or tax prep service, however you cant go over a certain amount or they will have to have what husky said!! Im not sure about the dollar amount!!! as my acct. does this for me!!

The other question is does your insurance allow you to hire subs? in the capacity your speaking of? you gotta be carefull as a sole Proprietor, one guy gets hurt & its all on you!!!! bye bye house, cars, furniture, etc...

be careful & consult with someone about this, can be risky!!

LXT...............


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## Canyonbc (Dec 11, 2007)

Husky137 said:


> Additionally, he has to be a legitimate sub. The sub should be carrying the proper insurances, fed tax id, all that jazz. If you are just calling him a sub to avoid these costs to yourslef then the government and insurance companies are going to consider him an employee.




The only sub i really use is a local, CA, licensed insured bonded. He made mention to a 1099 the other day but i was busy and didnt ask him to elaborate so i thought i would ask here. 

Thanks again everyone for all the help. 

Canyon


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## Canyonbc (Dec 11, 2007)

lxt said:


> Not true!! there is a misc. income exclusion, depends on your accountant or tax prep service, however you cant go over a certain amount or they will have to have what husky said!! Im not sure about the dollar amount!!! as my acct. does this for me!!
> 
> The other question is does your insurance allow you to hire subs? in the capacity your speaking of? you gotta be carefull as a sole Proprietor, one guy gets hurt & its all on you!!!! bye bye house, cars, furniture, etc...
> 
> ...




I am going to have to check on that. I am sure i wont use subs to the amount of 10,000 over a year...i was just using that as a easy figure to use...to try and understand the subject.


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## trimmmed (Dec 11, 2007)

Husky137 said:


> Additionally, he has to be a legitimate sub. The sub should be carrying the proper insurances, fed tax id, all that jazz. If you are just calling him a sub to avoid these costs to yourslef then the government and insurance companies are going to consider him an employee.



Good point and absolutely true! I believe the IRS has some guidelines as to whether it's a sub or an employee. It's hard to pass those guidelines even if you are a legit sub, lol.

Lxt, I don't know what income exclusion you are referring to. Please elaborate.


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## trimmmed (Dec 11, 2007)

Canyonbc said:


> The only sub i really use is a local, CA, licensed insured bonded. He made mention to a 1099 the other day but i was busy and didnt ask him to elaborate so i thought i would ask here.
> 
> Thanks again everyone for all the help.
> 
> Canyon



That sounds more than legit and should not be any problem for you.


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## lxt (Dec 11, 2007)

trimmmed said:


> Good point and absolutely true! I believe the IRS has some guidelines as to whether it's a sub or an employee. It's hard to pass those guidelines even if you are a legit sub, lol.
> 
> Lxt, I don't know what income exclusion you are referring to. Please elaborate.





Dept of Treasury(IRS) annual summary & transmittal of U.S. information returns. 1096 form specifically 1099-Misc section 95.

I was informed that if a sub works regular hours such as an employee, he`s not considered a sub, as husky stated a true sub will carry their own insurance, etc... a single person that is hire on at will falls into a different class, also you have to watch their quarterly earnings!!

I use to be in the same situation, to file the proper paperwork required more knowledge of the tax code than I have!! I found out the hard way, 1099`ed an employee he argued that he was not insured & not a subcontractor so he didnt file it!! I had to ammend my return, he was right, but he didnt want to pay taxes on what he earned!! I had to file other than 1099, bottom line one must report any income so he ended up paying the taxes!!

I considered it a lesson learned, this is why I now am straight across board. might cost ya more!! but less paperwork & headaches!! cause if they dont file that 1099 & dispute it..............can you say Audit!!!!


LXT................


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## hermit63 (Dec 12, 2007)

*I agree lxt*

Ok the best i remember and could have changed.
up to $600 gross pay per person, you can write off, but you will need to document(write it down) w/out a 1099 this can help if you have someone you can trust!-over$600 you must 1099. this is fed tax code
next is Insurance theres liability and health/injury and these are differant
health/ injury is workers comp and is a state Agency,and has its own code
employee vs. sub contractor. employee-you pay sub-they pay(no insurance and you can argue you are the employee of the HO-they pay(sick i know)
Liability, damages are settled in civil littigation.
three seperate animals, the transition to ligit payroll is tough but can be done in quickbooks. oh yah and lets not forget Unemployment ins. there part of the state agency as well.
So if a carpenter comes to your house, and cuts or smahses,brakes somthing thereself do you payfor it, you might have too.
If the guy your working with, cuts or smashes themself, brakes somthing,
do you pay for it, employee-yes sub-no, differance between the two,a contract.


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## Texas Chainsaw (Jul 8, 2008)

Here in Dallas I've done sub contract for a colleague friend. I paid taxes and he issued me a 1099 form. I did the same for someone else me sub contracting him but I pay the taxes since I sold the job under my company name.


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## Taxmantoo (Jul 10, 2008)

Don't pay cash if you can help it. Easiest way to substantiate an expense is to show the IRS the canceled check if it comes to that. 

Worst case I ever saw: Homebuilder paid the workers cash daily, tried to treat them as outside labor, but did not file 1099s for them. IRS disallowed his labor expense. When he asked a CPA for help, the best they could come up with was to prove the labor cost by establishing that the labor was an ordinary and necessary expense, and there's no way you can build houses without it. IRS would have none of that, labor cost does not fall under that principle. (it would have worked if he had inadequate records of materials purchases, but the IRS depends on 1099s and W2s for labor expense). It would have been possible to establish how much each employee was paid if he had issued checks, but when all he has is a daily withdrawal from the bank of $500-800, the IRS is going to disallow it. Getting hit with the tax bill bankrupted him. I don't recall if the IRS got anything out of him other than the satisfaction of putting him in bk court. 

If you pay a dollar's wages, you have to withhold 8 cents of FICA tax and file a w2 and w3. If you pay $600 to any one subcontractor in a year, you'll have to issue 1099misc and file a 1096. The 1099 is optional for all subs who receive less than $599. You'll report it as outside labor or subcontractors on your tax return. You do not have to file 1099s for payments to corporations, but you do for individuals and partnerships. If the business you hired is Trees-R-Us Inc, make sure you write Inc on the check. 

There are pretty solid rules on what's a sub and what's an employee. If you exercise total control over them, what they do, how they do it, when they do it, (your groundies) you're probably stuck with running them through payroll. If you pay them by the hour, it makes them look more like an employee than if you pay them by the job. If you pay a business (Manpower Temp Agency, Joe Blow's Tree Service) it's unlikely anybody will question your claim that you're not paying an employee. 
http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

Worker's comp: You better have an insurance certificate from everybody you don't want to pay comp insurance for if you have a worker's comp policy. The insurance company will audit your payroll and outside labor annually.


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## ponderosatree (Aug 3, 2008)

Sub contractors are just an expense. You pay taxes on the profit. Make sure your subcontractor has general liability insurance and you should have yourself named as an additional insured. If he has employees he better damn well have workers comp or you're ####ed if one of his workers gets hurt.


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