Tax and Reporting Free?

Q. Is there a statement somewhere in the tax laws that states, I can pay someone up to $600.00, tax free to both parties? Or something to that effect?

A. Yikes!  Every time I get a question like this it scares me to death.  “There is no such thing as a free lunch.”  “Certainty? In this world nothing is certain but death and taxes.” You can read more Ben Franklin quotes here.  Your statement illustrates the confusion most people have regarding payments to independent contractors, and the reporting required to the IRS for those payments.

First of all, if you have income, it is taxable.  I can confidently state that as a fact.  In your question the key is that if you as a business owner pay someone who is not your employee for services, you must provide a 1099 reporting total payments to that contractor by January 31 of the following year if you pay them at least $600.  You will file a copy of that 1099 with the IRS as well.  That company or individual is still required to claim the total paid by you to them for services regardless how small that amount is.  You can read more about 1099 reporting here.  Before you even cut a check to this person, you need to obtain a W-9, which tells you the ID number of the business.  If they do not provide you with a TIN (Taxpayer Identification Number), you may need to initiate backup withholding on that company of 28% and pay this to the IRS on their behalf.

The IRS has a term they like to use that fits this question as well.  It is called the Tax Gap.  The Tax Gap is the difference between what is paid to the government in taxes and what is actually owed.  One of the major sources of the tax gap is small business and independant contractors who don’t report (or pay taxes on) all of their income.  In your scenario, a legitimate business expense is of course deductible on your tax return.  The individual who received the money for performing the service needs to claim what was received as income.  Someone has to pay taxes on this money.  Any legitimate, documented business expenses incurred by the contractor while performing this service will reduce the amount of taxes owed at tax time.

Short answer:  No, no tax free money!

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