MTips

How to Claim a Subcontractor
By Olivia Savoie
Many small business owners rely on subcontractors to perform tasks or services for the company instead of hiring employees because subcontractors do not require the business owners to pay payroll taxes or purchase unemployment or worker’s compensation insurance. You can can deduct payments you make to a subcontractor as a business expense on your tax return, reducing your tax burden. Contract labor expenses are separate from other business expenses and must be claimed on a separate line of Schedule C.

Topic To Claim a Subcontractor Maker:

• Small Business Tax
• Owe IRS Taxes

To Claim a Subcontractor Difficulty:

• Moderately Easy

To Claim a Subcontractor You’ll Need:

• None

To Claim a Subcontractor Instructions:

• Gather the documentation you will need to accurately report the money you paid to the subcontractor. This may include accounting ledgers, financial software reports, copies of checks, pay stubs or invoices.
• Download Form 1099-MISC from the Internal Revenue Service website if you paid the subcontractor more than $600 during the tax year. Fill the form out with the contractor’s name, address, Social Security or tax identification number, the exact amount you paid the contractor, your or the company’s name and your employer identification number or Social Security number. Mail the form to the address you have on file for the subcontractor by February 15 to avoid fines from the IRS.
• Download Form 1040 from the IRS website. Fill out Form 1040 until you reach Line 12, where you place your business income. You must provide details about your business income and expenses on Schedule C.
• Download Schedule C from the IRS website. Place the amount you paid the contractor, even if it was less than $600, on line 11 of Schedule C, which is labeled “Contract Labor.” Complete the rest of Schedule C with information about your business income and expenses. Add all your expenses, including the subcontractor labor costs, and subtract that number from your total business income. Place that number on line 31 of Schedule C and line 12 of Form 1040.
• Complete Form 1040 and submit it by April 15 to avoid fines and added interest on any taxes your owe. If the IRS questions your subcontractor payment expenses, you must provide the documentation you gathered to prove the expenses. Failure to so so can result in the IRS refusing the expenses and requiring you to pay taxes on the income.

• The IRS advises business owners to keep all documentation pertaining to subcontractor payments for at least three years from the day you file the return.
• Review your return and double-check all calculations because an error can cause you to pay too much or too little tax.