Contract labor

Technical topics regarding tax preparation.
#1
Posts:
54
Joined:
12-Feb-2020 2:57pm
Location:
Hawaii
Have a client that has a farm that started using contract labor for last couple of years. I told him that he needed to file 1099's for the laborers. He did not file in 2019 and we decided not to deduct the amount paid. Again in 2020, same situation except the client wants to deduct the amount paid. Not looking forward to our next conversation. Contemplating firing this client if he keeps insisting on deducting. The amount is significant for 2020 and the income is low so it would look very strange to say the least. Client has many excuses as to why he won't file the 1099's. None any good. Asking our posters how they would handle this situation.
 

#2
CathysTaxes  
Moderator
Posts:
3557
Joined:
21-Apr-2014 9:41am
Location:
Suburb of Chicago
I would disengage. Recently got rid of a long term client who each year had an excuse. During COVID-19, I just couldn't take him anymore.
Cathy
CathysTaxes
 

#3
fish  
Posts:
159
Joined:
1-Apr-2020 3:53pm
Location:
Alexandria VA
I'm sorry.. where in the Internal Revenue Code does it say no deduction if you don't issue 1099s? You might want to get rid of the client because he doesn't issue 1099s and you think he should, but i wouldn't not claim the deduction. It's still a business expense.

Just make sure to mark the question about whether he filed 1099s.
 

#4
Posts:
1121
Joined:
12-May-2021 11:01am
Location:
Alabama
I agree with fish. Can the farmer prove that he made the payments? If so, then it's deductible.

Do answer the 1099 question on the Sch. F. But I have never seen this cause an audit or any other contact from the IRS. (I suppose it may increase their DIF score or something, but audit rates are really low in general.)

I will say that in a state income tax audit we represented a client in, the auditor said that they would have accepted a Form 1099 as proof of the expense when there was no other documentation of the contract labor paid in cash.

I'm not saying whether you should or should not terminate the client. It's up to you whether you want to be engaged to prepare an income tax return for a client that does not also engage you to file Forms 1099 (and that you know does not file them himself). But we've got a few clients that either really don't want to file Forms 1099, or they don't give us any information about it in January and it feel like too much of a hassle when you're working on an extended tax return in the summer to track down all the 1099 information and file the forms late. True, these are not our best clients. But if they're otherwise not bad clients, we haven't felt the need to terminate them.
 

#5
Posts:
8152
Joined:
4-Mar-2018 9:03pm
Location:
The Office
fish wrote:where in the Internal Revenue Code does it say no deduction if you don't issue 1099s


This.

Are many of the workers here illegally? That might explain the hesitancy.

I would explain in an email willful failure-to-file penalties, duty to request and obtain a W-9/W-8, backup withholding, and the need to mark the 1099 question boxes on the return accurately. Then I would save the email to PDF and file that away as a carryforward.

You'll need to decide whether or not to disengage based on professional standards and strategic outlook.
 

#6
jon  
Posts:
1535
Joined:
3-May-2014 11:11am
Location:
minnesota
About 10 years ago a tax preparer who belongs to my Monday Tax Forum had a roofer client audited. The IRS asked for proof of the deduction for contract labor and who it was paid to, client got an attorney involved and it ended up they accepted the lose of the deduction and income taxes, penalties and interest were paid. They basically decided that is where they were going to end up at the end of the fight anyway. Very little or NO backup for who it was paid to, tax ID#, or address this was a busy year where they would get other workers off competitors jobs by offering cash bonuses, and competitors where doing the same to him.
 

#7
JR1  
Posts:
6043
Joined:
21-Apr-2014 9:31am
Location:
Western 'burbs of Chicago
Tough one. You've got a guy just trying to harvest his veg and of course he's using migrant workers. Just how that is. Any of your kids willing to do that?

But then what? First, if no one earns $600+....there is no 1099 requirement, and that might fit many. I wonder if he can create of list of names, dates, amounts paid....would they be willing to sign it? Some might, some not...but it's an attempt to document. And unless someone goes over 600....
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#8
Posts:
1174
Joined:
21-Apr-2014 7:09pm
Location:
NC
fish wrote:I'm sorry.. where in the Internal Revenue Code does it say no deduction if you don't issue 1099s? You might want to get rid of the client because he doesn't issue 1099s and you think he should, but i wouldn't not claim the deduction. It's still a business expense.

Just make sure to mark the question about whether he filed 1099s.


Yeah.. sad but true. I would probably disengage long term BUT I am unaware of a law that prohibits the deduction for not sending a 1099.
 

#9
jon  
Posts:
1535
Joined:
3-May-2014 11:11am
Location:
minnesota
If audited and they ask for back up what are you going to show them? If you have bill with name and address and hours work you may keep the deduction, if you have casual piece of paper with hours written on them, may not sustain the deduction. Is it not 263 that tells you what you need for a qualifying deduction. 1099 can work - what else?
 

#10
Posts:
1174
Joined:
21-Apr-2014 7:09pm
Location:
NC
jon wrote:If audited and they ask for back up what are you going to show them? If you have bill with name and address and hours work you may keep the deduction, if you have casual piece of paper with hours written on them, may not sustain the deduction. Is it not 263 that tells you what you need for a qualifying deduction. 1099 can work - what else?


I assume he has cancelled checks…… no where did it say cash.
 

#11
Posts:
54
Joined:
12-Feb-2020 2:57pm
Location:
Hawaii
Finally got a response from client. Paid via cash so definitely no record. I didn't ask in 2019 since we decided not to take the deduction and client said he would file 1099's in 2020. Well, I should have seen this coming as no 1099's filed or will be filed. Since the spouse was and is a long time client that got married to the farmer, I'm hesitant to just disengage. I'll will propose not deducting again in 2020. I will disengage if he insists but I will speak to the spouse to see if agrees with forgoing the deduction. I'm almost positive she understands the risk to both of us and will convince her husband since she is usually the one that interact with anyway.

Thanks for the feedback as I do feel more confident in what I was thinking about doing.
 

#12
CathysTaxes  
Moderator
Posts:
3557
Joined:
21-Apr-2014 9:41am
Location:
Suburb of Chicago
No record, no deduction. I'm amazed at the number of business owners that still do that.
Cathy
CathysTaxes
 

#13
Posts:
824
Joined:
28-Apr-2014 9:53am
Location:
Eastern United States
If there is no record, how is the farmer determining the "amount paid?"

I would actually be more worried that these workers s/be classified as employees.
 

#14
Posts:
8152
Joined:
4-Mar-2018 9:03pm
Location:
The Office
I would advise the client that if he wants to deduct moving forward, bare minimum, he should be creating receipts for the cash payments which name each recipient and have the recipient sign off.

If he is unwilling to do that, he's just going to have to subsidize his contractors' tax bill.
 

#15
Posts:
8152
Joined:
4-Mar-2018 9:03pm
Location:
The Office
FullContactPrep wrote:but I will speak to the spouse to see if agrees with forgoing the deduction. I'm almost positive she understands the risk to both of us and will convince her husband since she is usually the one that interact with anyway.


Tell her that without substantiation and/or a 1099 filed, the IRS will generally disallow the deduction upon audit or examination. The clients' returns will be adjusted and they will owe taxes, penalties and interest -- including probable substantial underpayment penalty.

Filing 1099s and creating receipts is a pain, but it's much less costly than the above.
 


Return to Taxation



Who is online

Users browsing this forum: Anderly, CaptCook, dellpaul, golfinz, JAH, JoJoCPA, KoiCPA, lckent, missingdonut, SALYstrikesagain and 215 guests