Free Educational Video
How to Pay Independent Contractors for my Rental Property
Total Watch Time: 7 Minutes and 19 Seconds
Last Updated: | Author: John Hyre | Topic: How to Pay Independent Contractors for my Rental Property
Date: February 25, 2019
How to Pay Independent Contractors for My Rental Property – Video
John Hyre: What is petty cash? Petty cash is the wallet. For the most part, when you’re spending money in business versus receiving money, two distinct things. When the tenant offers you cash, is that ideal? No. Do you take it? Yes, because they may not have it five minutes later, so you take it. When you spend- I really prefer that you not spend with cash because it’s hard to back up on audit.
First of all, the government’s becoming increasingly hostile to cash. Why would that be? One word, control. Control, they want control. That’s also known as power. From a deduction standpoint, if you spend on a debit card, with a check, with a credit card, you have someone, a third party, typically a bank, saying, “You actually spent the money.” It’s a lot easier to prove.
Some of you are going to say, “But my contractors want cash.” There’s some reasons for that. First of all, it means they don’t intend to pay taxes. Contractors who are not afraid of the IRS are not afraid of me. That’s a problem. I prefer a certain bit of fear in contractors when they’re dealing with me. I get better results that way.
There are issues with the government, it attracts attention. I’m telling you, on audit, first question they ask is, “How much cash receipts do you get? How much do you pay out with cash?” The audit is going to be a little different, you’ll hear the snapping of the rubber glove in the background.
I really don’t like cash. I do understand, being in the same business you are, how hard it is to find really good contractors. They all have a shelf life. Every contractor has a certain number of uses in them until they’re worthless or worse than worthless and you don’t know what it is.
With a clip of ammo- I know that’s not a fair analogy, but with magazine of ammo, at least, I know how many rounds are in it and how many uses I can expect out of the gun. With a contractor, at some point, randomly, when you least need it– It’s like when you’re being mugged with a gun and you hear the click. That’s going to happen with your contractors.
What’s my point? Being in your business, I understand how valuable a good contractor is. You have to weigh the risks of paying them cash versus not. If you’re in a situation where you really have a good one, but they demand cash, you have to make a judgment call. Do you go to jail for paying your contractor cash? No. Are there some 1099 issues? Yes. The government is now– I know this is going to be hard for you Bay Area people. This is where some of you walk out. Socialism is expensive and that health care wasn’t free.
Now, the collector comes calling, the IRS is under immense political pressure to collect. They are enforcing laws that we didn’t know existed, and that they didn’t, but they’ve dug, dug, dug until they find laws that were not enforced. One of them is 1099.
Something I haven’t seen in years. I’ve only heard of it. I saw it happen recently with a contractor who was not my client because he was not well-advised, came to us- one of us to see if we can help him in an audit. The sad answer was, we couldn’t do a lot.
Here’s what happened. He was from Guatemala, legally, the American dream kind of guy. He had a concrete company. He did my driveway, that’s why he came to me. He did great work. He probably made $50,000 to $70,000 a year, which in the Midwest is a good living. Living the American dream, like every other contractor out there, hires a bunch of illegal Mexicans, but he, at least, 1099-ed them.
He actually made an effort to do the right thing. They, of course, gave him bogus social security numbers. He didn’t have a W9. W9 is a form that whenever you have a contractor, you hand him a W9, they fill it out and they sign under penalties of what? Forgery.
That’s orange jumpsuit. That this was correct. How many people you think have signed those and it’s not right? Could the government put them away if it wants to? Yes. The government could put anybody in this room away if they really want to. You need to understand that.
If you don’t believe me, there’s a book called Three Felonies a Day. Read it. It’s depressing, spare time reading. If you ever accidentally overdose on your happy meds-read that book.
Because the social security numbers were wrong and he did not have a W9, because a W9 would’ve protected him, he was treated as if he had not issued a 1099 at all. What does that mean? If you don’t issue a 1099 to someone you’re supposed to, they can give a penalty of about $200-$250, which is no big deal, but there’s another thing they can do. They haven’t done it traditionally, but I’m starting to see it, you pay their tax at 42%, gross, not net. Put him out of business. He’s working in a Wendy’s now.
By the way for you progressives, that is the inevitable consequence of the bureaucracy of the machine you have created. They put the guy out of business. We managed to knock out a lot of them because we went to the Mexican guys and said, “Could you file a return and get this guy off the hook?” The ones we could find filed and they all got refunds and they didn’t pay any money in. Conditional child tax credit, I’m not kidding.
A refundable tax credit, let me translate for you. I’m going to speak government, then, English. Government, refundable tax credit, English, handout. These guys all got refunds and he no longer was on the hook for them because they filed their returns, but the ones he couldn’t file returns for added up to about $300,000 in extra taxes for him. Out of business immediately. You need 1099s.
What’s the rule on 1099s? First of all, it’s only for business, it’s not for private. If somebody cuts your lawn at you house house, you don’t have to 1099 them. If somebody cuts your lawn at your rental house, you have to 1099 them and it’s if you pay $600 or more per year. Do not play the game.
Let’s say I give you $500, what’s your wife’s name? Rosalita? She gets $500. How many kids do you have? 20? Okay, we’re going to give each of them $500. It’s all under $600 and you don’t have to 1099. People, that’s fraud. Now, you can wear an orange jumpsuit.
Now, are they going to come after you on that because it’s so widespread? Are they going to come after you? Not unless you attract attention. If you upset the wrong person and he talks to a prosecutor and says, “This guy needs to shut up,” then, what happens? They start digging and they got something on all of you. File your 1099s. Do your 1099s. I don’t agree with it, but it is the rule. Why is it relevant? When you pay cash, they suspect you’re not doing the things you’re supposed to do. I really like to see you guys use debit cards, credit cards, and checks to pay for things.