Let’s say a family child care provider hires someone to clean her home, mow her lawn, do gardening, plow their driveway, or do handyman repairs jobs. Or maybe you pay someone to enhance your program by offering music, dance or swimming lessons.
You can deduct 100% of the cost of paying someone to enhance your program, and your Time-Space Percentage of the cost of work to maintain or clean your home.
But, what are the proper records to keep to ensure that the IRS will allow you to deduct these expenses on your taxes?
The first issue is to determine if this person is an independent contractor or an employee?
The distinction is important! If you have an employee you must follow all the federal and state payroll tax rules and file a series of tax forms. Generally, someone who is not helping you care for children and is not operating under your direction and control is considered an independent contractor. When you have an independent contractor the only form you may have to file is IRS Form 1099-MISC.
In all of the examples cited above, such people would be considered independent contractors. See my article, “Are Helpers Your Employees or Independent Contractors?”
Don’t make the mistake of thinking that if you paid someone less than $600 you don’t have an employee. Whether or not you have an employee is not based on how much you paid the person. See my article on this.
The second issue is to determine if you must issue an IRS Form 1099-MISC?
If you pay an individual less than $600 in a year you do not have to issue IRS Form 1099-MISC. If you pay $600 or more and the person is in business for him/herself, then you must issue IRS Form 1099-MISC. Send one copy to the IRS and another copy to the person you paid.
If the person works for a company and you pay the company, you don’t have to issue this form.
So, if your neighbor Joe Smith mows your lawn or plows your driveway (and you pay him $600 or more), you must file this form. If Joleen Armstrong cleans your home and is in business for herself, you must issue this form. But, if she works for the Busy Bee Cleaning Company and you pay the company, no form is necessary.
The penalties for not issuing IRS Form 1099-MISC have recently gone up. If you don’t file this form by the required filing date (April 15th), but file it within the next 30 days, there is a $50 penalty for each person you should have filed the form. If you correct your failure to file after 30 days and before August 1st, the penalty is $100 per person. After August 1st the penalty is $260 per person.
What records you should keep
Regardless of whether you are supposed to file Form 1099-MISC or not, it’s important to keep the proper records so you can pass IRS scrutiny in an audit.
This can be difficult because you are probably giving the person cash and the person may not want any record to be kept of the transaction because they may not be reporting it as income.
If you pay the person by check, make a note in the memo line as to what work was done (“Mow the lawn,” “House cleaning”). If possible, give the person a receipt and have them sign one copy for your records.
If you are paying by cash and the person doesn’t want to sign a receipt, take the following steps:
- Write down the name, address and phone number of the person you paid. They may be reluctant to give you their address or phone number, but you should insist.
- Make a note on a calendar or somewhere else the date the work was done and what was done: “July 3rd, 9-10am music lesson by Andrea Mulhern.”
- Write down the amount you paid the person: “Paid $100 cash August 10th to Jose Alverez for fixing broken pipe.” Ideally, withdraw the exact amount from your bank account so you can show this as evidence of your payment.
- Take pictures of the work that was done (before and after driveway is plowed or room is cleaned).
If you realize you have not filed Form 1099-MISC for someone you hired in 2016, consider filing this form before August 1st and pay the $100 penalty, to avoid an even bigger penalty later.
I’ve seen family child care providers make the mistake of not keeping proper records when hiring independent contractors. They aren’t cheating because they know they paid various people to do work for them. However, when faced with having to show records of exactly who they paid, how much they paid, and what work was done – they come up short.
Don’t let this happen to you.
Tom Copeland – www.tomcopelandblog.com
Image credit: https://pixabay.com/en/lawn-mower-lawn-mowing-rush-mow-2127637/
For more information, see my annually revised book Family Child Care Tax Workbook and Organizer.