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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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Someone wants me to pay them cash and to say it is consulting

Resolved Question:

Someone wants me to pay them cash and to say it is consulting fees which is in essense what it is but they are not a business. We are talking several thousand dollars. Doesn't sound legal to me. Is it legal?
Submitted: 7 years ago.
Category: Tax
Expert:  Merlo replied 7 years ago.

Hello JA Customer,


What type of services exactly did this person perform for you?


Did he perform these services for you personally or were they performed for a business that you own?



Customer: replied 7 years ago.
I am a construction manager for a meditation center and this person is a member of the meditation community and is going to install the HVAC system for the pagoda we are building. He wanted to bid the job using his father in law's company(an HVAC contractor) as the contractor but his father in law had a stroke and it is not possible any more so he has cooked up this idea that he can still do the work and collect a lump sum when he finishes. All we have to do is say that they are consulting fees. He has done a major revamping of the system and so he has indeed done a bit of consulting but he doesn't have a business and is not licensed.
Expert:  Merlo replied 7 years ago.

Hello again JA Customer,


Thank you for the additional information.


The person who did this work for you does not actually have to be established as a formal business, at least not for tax purposes. There are many people who operate as sole proprietors or independent contractors with no formal business in place.


However it seems obvious to me that the reason he wants to be paid in cash is that he does not want to report this as taxable income on his own personal return, which he would be liable for. If you pay him in cash, then you run the risk of having this disallowed as a business deduction of the mediation center, as you really have no concrete proof that he was paid. The most you could obtain from him would be a signed receipt, but that is simply not good business practice, particularly when you are talking about an amount that involves several thousand dollars. The mediation center should issue this person a check for his fees from the business account to ensure they have no problems at the end of the year with deducting this as a business expense.


You also need to have this person fill out a W-9 form for you before you issue him any payments. Any time that you pay an independent contractor $600 or more for the year for services they have performed for your business, you are required to issue them a Form 1099-MISC at the end of the year to report the amount they were paid. On the W-9 form he needs to supply you with his name, address and social security number, as you will need this information at the end of the year to complete the 1099 form. You should also keep a copy of that 1099 form in your permanent records as proof of the information he supplied to you.



Thank you JA Customer



Customer: replied 7 years ago.
Just one more thing. He will be paid while he is doing the work as an employee. The difference between a set amount and what we wind up paying him will be the check he is to receive. In other words he will be filling out a w-2 and a w-9. Is this still kosher?
Expert:  Merlo replied 7 years ago.

Hello again JA Customer,


That type of situation is frowned upon by the IRS and could end up getting your company in trouble.


The IRS requires that you make clear distinctions between people who are your employees and people who are independent contractors. When you pay someone as an independent contractor, the employer does not have to withhold any taxes and they do not have to pay the employer's normal share of SS and Medicare.


The only way that you could get by with issuing this person both a W-2 as an employee and a 1099 as an independent contractor is if the services he was performing for you as an independent contractor were substantially different than the services he provides as an employee. If his normal duties as an employee include repair, installation and maintenance work on HVAC systems, and those are the same services he provides to you outside of the normal work routine, then you could not separate those fees. The entire amount you pay to him would need to be reported on the W-2 form with the appropriate taxes withheld.


An example of a situation where the services would be considered substantially different would be if you have an employee that works for you as a maintenance person, but on the side he performs service for you as an IT consultant and he offers those same IT consulting services to other businesses or individuals.



Thank you JA Customer



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