If I didn't send a 1099 and I paid someone over $600, can I still deduct $599?

[ACtaxpayer]

I paid a worker over $600 for a business expense.  I stupidly did not get his SS# up front, because it didn't occur to me when I hired him that he might be an illegal tax evader who doesn't claim his income.  Can I still deduct $599 of the total as a business expense if the proof of payment and invoice are actually $850?  I live in a small town and it would not be wise of me to make this an issue with this worker; I need to let it go that he won't give me his social...I just want to know if I'm totally screwed on my taxes (meaning I can't deduct any of it) or only partially screwed (I can deduct $599).  I don't want to do anything that wouldn't hold up in an audit.  Thanks.

[VolvoGirl]

You can still deduct all of it,  the whole amount.  That is Contract Labor on Schedule C line 11.

How to enter Contract Labor

https://ttlc.intuit.com/community/entering-importing/help/how-do-i-enter-contract-labor/00/27407

[Mike9241]

What are the penalties for a business failing to meet a 1099-MISC or 1099-NEC deadline?

If a business fails to issue a form by the 1099-NEC or 1099-MISC deadline, the penalty varies from $50 to $270 per form, depending on how long past the deadline the business issues the form. There is a $556,500 maximum in fines per year. If a business intentionally disregards the requirement to provide a correct payee statement, it's subject to a minimum penalty of $550 per form or 10% of the income reported on the form, with no maximum.

even if you were only to deduct $599 you would still be liable for the failure to file penalty. 

[ACtaxpayer]

The level of anger the contractor had when I asked him for his social security number was sufficient to make me decide not to send him the 1099.  I interpreted his words as a threat.  Needless to say I will never hire him again.  But my and my family's safety and well being are not worth sending the 1099; I'd rather be subject to IRS penalties for not issuing the 1099...however, I fail to see how the IRS would even know, unless they are in the practice of verifying contract labor expenses under $600.  As I type this, I think I am answering my own question.  I think the IRS could, during an audit, ask to see documentation of any expense they want to, including contract labor expenses under $600.  Then the question becomes what would they do if they see that it was a legitimate expense that was in reality OVER $600 (meaning I claimed less of an expense than I was entitled to), for which I didn't issue a 1099....and your answer is that it would be a minimum penalty of $550 per form or 10% with no maximum...so the only remaining question is under what conditions would they impose a higher penalty than the minimum.  I think they would be unlikely to impose more than the minimum penalty under these circumstances.  And if they do, shame on them for picking on the little guys when people like Trump get away with all kinds of tax loopholes.  My husband is disabled with brain cancer (incontinent, can't walk without falling) and I support us the best I can while we live in one of the only developed democracies/countries without healthcare provided to all citizens.  Our taxes support the billionaire class and their lavish lifestyles and half the country votes in favor of that in election after election. 

[Carl]

The level of anger the contractor had when I asked him for his social security number was sufficient to make me decide not to send him the 1099.

Sounds to me like both you and the contractor are not aware of the requirements and methods.

I can understand why someone would not want to give you their SSN. You understand too. But maybe the contractor isn’t aware of just how fast and easy it is for them to get an EIN (Employer Identification Number)?  Make them aware that they can go online to http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Apply-for-an-Employer-Identification-... and it will only take them about 10 minutes to get an EIN – which they can then provide to you as required by federal law.

Assuming you have already requested this information from your contractor, and they still refuse to provide it. here is the procedure that you must follow, in order to report the expense without penalty, without the contractor’s SSN or EIN.

First, understand that you can not e-file your return without the SSN or EIN. You will have to print, sign and mail it to the IRS. There is no alternative or workaround for this.

Next, print out a form W-10 (Dependent Care Provider’s Identification and Certification) from the IRS website at https://www.irs.gov/pub/irs-pdf/fw9.pdf.

Fill out the W-9 form with all the information that you know.

Make 2 additional copies of the filled out W-9 for your own records.

Mail the form to the contractor via certified mail. Don’t lose your post office receipt.

The contractor has 10 calendar days to respond. If they respond with the information you need, then you’re good to go. If they have not responded, then on the 11^th day after you mailed it certified mail:

Select the “print and file” option for your tax return. This will print only the documents required for filing, along with an instruction sheet that contains the address of the specific IRS processing center you will mail it to.

Include in your mailing a copy (not an original) of your proof of notification (the certified mail receipt you got at the post office), and a copy of the W-9 that you sent to the caregiver.

That’s it. While this will delay your refund (it’ll be 6-8 weeks before you get it), you’ll avoid any penalties. At this point, it’s no longer your problem – it’s the contractor’s.

[Carl]

The level of anger the contractor had when I asked him for his social security number was sufficient to make me decide not to send him the 1099.

Sounds to me like both you and the contractor are not aware of the requirements and methods.

I can understand why someone would not want to give you their SSN. You understand too. But maybe the contractor isn’t aware of just how fast and easy it is for them to get an EIN (Employer Identification Number)?  Make them aware that they can go online to http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Apply-for-an-Employer-Identification-... and it will only take them about 10 minutes to get an EIN – which they can then provide to you as required by federal law.

Assuming you have already requested this information from your contractor, and they still refuse to provide it. here is the procedure that you must follow, in order to report the expense without penalty, without the contractor’s SSN or EIN.

First, understand that you can not e-file your return without the SSN or EIN. You will have to print, sign and mail it to the IRS. There is no alternative or workaround for this.

Next, print out a form W-10 (Dependent Care Provider’s Identification and Certification) from the IRS website at https://www.irs.gov/pub/irs-pdf/fw9.pdf.

Fill out the W-9 form with all the information that you know.

Make 2 additional copies of the filled out W-9 for your own records.

Mail the form to the contractor via certified mail. Don’t lose your post office receipt.

The contractor has 10 calendar days to respond. If they respond with the information you need, then you’re good to go. If they have not responded, then on the 11^th day after you mailed it certified mail:

Select the “print and file” option for your tax return. This will print only the documents required for filing, along with an instruction sheet that contains the address of the specific IRS processing center you will mail it to.

Include in your mailing a copy (not an original) of your proof of notification (the certified mail receipt you got at the post office), and a copy of the W-9 that you sent to the caregiver.

That’s it. While this will delay your refund (it’ll be 6-8 weeks before you get it), you’ll avoid any penalties. At this point, it’s no longer your problem – it’s the contractor’s.

[Opus 17]

You can deduct all your ordinary and necessary business expenses, even if you didn't issue the correct tax paperwork.  The penalty for not issuing a 1099 is not losing the deduction, it is a separate monetary penalty.

Next time, don't engage any sub without a W-9.