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If I pay contractor cash, can I still claim it as expense

I hired someone to do the painting for my rental property. The contractor prefers cash. He will still give me a receipt. If I pay him with cash, I can still claim this as my rental maintenance right?


Also, do I need to give him 1099? If so how? Do I need to get his SSN? Thank you!

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14 Replies

If I pay contractor cash, can I still claim it as expense

Yes, but he must declare it as income. So be sure to get his SSN or EIN, and issue him a 1099-NEC.

TomD8
Level 15

If I pay contractor cash, can I still claim it as expense

[edited] The IRS rule is that you must issue a 1099-NEC to a contractor to whom you pay $600 or more in the course of your trade or business.  The IRS also says "you are engaged in a trade or business if you
operate for gain or profit." 

https://www.irs.gov/pub/irs-pdf/i1099mec.pdf

 

You must enter the contractor's SSN or EIN on the 1099-NEC.  If the contractor prefers not to divulge his SSN, he can obtain an EIN online here (there's no charge):

https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-n...

**Answers are correct to the best of my ability but do not constitute tax or legal advice.
rjs
Level 15
Level 15

If I pay contractor cash, can I still claim it as expense

You must issue a Form 1099-NEC (not 1099-MISC) to any contractor to whom you pay a total of $600 or more for the year. You must, of course, also file the 1099-NEC with the IRS. As TomD8 said, Form 1099-NEC is only for payments from your business (which includes a rental property), not for a contractor who did work for you personally, such as work on your own home. Form 1099-MISC is no longer used for payments to contractors.


If the total that you paid a contractor during the year is less than $600, you do not have to issue a 1099-NEC. You can still claim it as an expense of your rental property. Your accounting records for the rental should show the payment.


In order to issue a 1099-NEC you must have the contractor's tax ID number (EIN or SSN). To avoid problems, you should always get a contractor's tax ID number before the contractor does any work for your rental, even if you don't expect to pay $600 or more, in case you end up using the contractor for additional work later in the year.

 

If I pay contractor cash, can I still claim it as expense

 Insist he fills in a W-9 form BEFORE you pay him one thin dime so you have all info you need to issue a 1099 at the end of the year.    https://www.irs.gov/forms-pubs/about-form-w-9

 

 

Hal_Al
Level 15

If I pay contractor cash, can I still claim it as expense

Q. Do I need to give him 1099? If so how? Do I need to get his SSN?

A. Simple answer: no. 

It became a little fuzzy under the new 2018 tax law. Landlords are, generally, still not require to issue 1099 forms to service providers.

References: http://www.forbes.com/sites/irswatch/2013/03/06/should-landlords-be-filing-1099s-for-service-provide...

 

Q. If I pay him with cash, I can still claim this as my rental maintenance right?

A. Simple answer: yes. But, your burden of proof in case of an audit will be a little tougher.  In addition to a receipt, it might be helpful if you bank statement showed a withdrawal for that amount in that time frame.  

 

 

If I pay contractor cash, can I still claim it as expense

If I pay contractor cash, can I still claim it as expense

very informative article.

 

It says:

"The basic rule is that you must file a 1099-NEC form with the IRS if you pay an unincorporated independent contractor $600 or more during a year for rental-related services."

 

If the contractor has his own business, does that mean I don't need to worry about it?

Hal_Al
Level 15

If I pay contractor cash, can I still claim it as expense

Q.  If the contractor has his own business, does that mean I don't need to worry about it?

A.  No.

 

Taxes are complicated.  You "don't need to worry about it", but not for that reason.  

 

I assume you have a residential rental unit and file Schedule E. That is, your rental activity is not a trade or business and it does not qualify for the QBI (qualified business income) deduction.

Carl
Level 15

If I pay contractor cash, can I still claim it as expense

@Hal_Al the Forbes article you referenced is over 9 years old.

@SweetieJean The article you referenced states, " However, the IRS has recently made it clear that all landlords should file Form 1099-NEC."

I've looked all over, and not just IRS Pub 527. I can't find anything anywhere on the IRS website where the IRS has "made it clear". Perhaps it's clarified in 527 and I just missed it? Can you help please?

@tianwaifeixian you asked "If the contractor has his own business, does that mean I don't need to worry about it?"

You may need to worry about it. You are not required to issue a 1099 of any type to an incorporated business (exceptions apply). Most likely your contractor is a sole proprietor or LLC; neither of which is incorporated.

 

If I pay contractor cash, can I still claim it as expense

sorry I probably didn’t make myself clear in my last reply- I was asking if the contractor has his own company, do I still need to give him 1099-NEC. Since based on the part I copied from the article, I only need to give the 1099 for unincorporated   independent contractor

TomD8
Level 15

If I pay contractor cash, can I still claim it as expense

@tianwaifeixian --

 

"If the contractor has his own business, does that mean I don't need to worry about it?"

 

If the contractor is a corporation, you don't have to issue a 1099-NEC.

 

Here's an informative article on whether or not rental real estate activity qualifies as a "trade or business":

https://www.nolo.com/legal-encyclopedia/is-your-rental-activity-business-investment.html

 

If your contractor is not a corporation, I'd just go ahead and issue the 1099-NEC.  There's no penalty for doing so, and it'll serve to document the expense.

**Answers are correct to the best of my ability but do not constitute tax or legal advice.
rjs
Level 15
Level 15

If I pay contractor cash, can I still claim it as expense


@tianwaifeixian wrote:

I was asking if the contractor has his own company, do I still need to give him 1099-NEC.


"His own company" and a corporation are two different things. "His own company" is not a precise legal term. His own company could be a sole proprietorship, an LLC, or a partnership. For any of those, you do have to issue a 1099-NEC. Only for a corporation is a 1099-NEC definitely not required. A corporation will usually have "Inc." at the end of the business name. If you have every contractor fill out a Form W-9 for you, they will indicate on the W-9 what type of organization the business is.

 

If I pay contractor cash, can I still claim it as expense


@TomD8 wrote:

If your contractor is not a corporation, I'd just go ahead and issue the 1099-NEC.  There's no penalty for doing so, and it'll serve to document the expense.


I wholeheartedly agree with this, particularly since you are paying cash, @tianwaifeixian

 

Further, make sure to get an invoice that is detailed, dated, and marked "paid".

If I pay contractor cash, can I still claim it as expense

@Carl Further on in the article I cited, it says this:

 

In its final regulations on the pass-through deduction [emphasis added], the IRS discusses how to determine if a rental activity qualifies as a business. It says that "taxpayers should consider the appropriateness of treating a rental activity as a trade or business…where the taxpayer does not comply with the information return filing requirements." Information returns means filing Form 1099-NEC. In other words, it may not be appropriate to treat a rental activity as a business if a landlord does not file all required Forms 1099-NEC.

 

This is something the IRS has never said before. So now we know: Landlords should be filing 1099s. Failure to do so is a mark against you if the IRS ever questions whether your rental activity is a business.

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