Taxed Twice?

Today TaxMama hears from Kerry in Iowa, who tells us. “My husband is a sole proprietor general contractor. The lumberyard has handed him some great jobs. But they have been the general contractor on them. They pay my husband for his contracts with them. Recently, we hired a subcontractor to do the electrical work, which was supposed to be paid by the lumberyard directly to the electrical contractor. The lumberyard now wants my husband to pay the electrical contractor himself – and the lumberyard will pay my husband. Do I report this as OUR income?
I know to 1099 the electrical contractor. But, how do I keep from being taxed on this money that is just basically run thru our business to pay the subcontractor?”

Dear Kerry,

All you need to do is to report all the income you receive from the lumberyard. Then deduct the money you pay to the electrical subcontractor.

Don’t worry. You won’t get taxed on that money.

For instance, suppose your husband earns $50,000 from the lumberyard for his own work. And the lumberyard pays him $12,000 towards the subcontractor’s work.

Instead of reporting $50,000 as his gross income, he’ll report $62,000. BUT, he’ll also deduct that $12,000 for the subcontractor as cost of goods sold, or as an operating expense. So, his income will still be only the $50,000 he earned in the first place – less his own business deductions, naturally.

Things to pay attention to:

1) If the sub is not licensed, or only does work for your husband, you may need to look into putting him on payroll – and raising your billing to the lumberyard to take into account the extra costs.

2) If the sub is licensed and has a business, you will probably need to send him a 1099 – unless the sub is a corporation. (You already know how to do that.)

It will all work out properly.

But, if you’re going to help your husband with the business end of his work, please do read this book. Small Business Taxes Made Easy http://www.taxmama.com/AskTaxMama/book/

It will help you enormously! You’ll get a good understanding of the tax and business issues – and it’s really easy to read.
And remember, you’ll find answers to questions about paying subcontractors and all kinds of tax issues, free. Where? Where else? At TaxMama.com

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