Paying Consultant

Today TaxMama hears from Stacy in Pleasanton, CA, who asks. “I paid someone for consulting. They do not have a business license. In order to not pay taxes on the money that was paid to the consulting firm, I was advised to 1099 them. Will I be exempt from paying taxes on the money I paid them? Thanks so much for your help!”

Dear Stacy,

Actually, IRS doesn’t have any rule or requirement that the person you pay must have a business license.

Your city might. But IRS doesn’t.

Whoever you pay should be reporting that income and paying taxes on, as far as IRS is concerned.

So, definitely, if you paid them $600 or more – do issue a 1099-MISC to them. If you paid them less than that, there’s no need to issue that 1099.

Will you be exempt from tax for the money you paid them? Well, you do get to show that amount as a deduction on your Schedule C. So it will reduce your profits. So, yes, you won’t have to pay tax on the money you paid them.

But whoever advised you to issue that 1099 was wise. If you did pay them $600 or more, and you were to get audited, IRS would have the right to question or deny your deduction if that 1099 had not been issued – and your good buddy didn’t report the income.

So keep up the good work!

And remember, you’ll find answers to questions about business and all kinds of tax issues, free. Where? Where else? At TaxMama.com

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