1099 for sub-contractors

[Gretel]

My mind was just blown off, hey, I might have been wrong all along.

Contractor is hired by A to construct building who in turn hires a bunch of sub-contractors. All expenses are paid through draws from bank.

Who is responsible for issuing 1099's and why?

Contractor because he is the one hiring and will be held responsible if anything happens by sub-contractors.

A because loan is in A's name.

Something else.

[ATSMAN]

The general contractor is responsible for issuing 1099 to his subs and must have a W9 on file.

The owner of the property just has to make sure that he gets lien releases from all contractor and subs before making his final payment to the general. If any of the subs were stiffed by the general contractor they can get a "mechanics lien" attached to the property. That will mean the owner can not convey the property without satisfying that lien.

How do I know this? My brother in law fell victim to this scam! The general contractor was supposedly a friend too.

[Gretel]

continuing story

Contractors accountant is adamant that the only relevant factor is that subcontractors were not paid through contractors checking account. Contractor now want to talk to the IRS, we all know what that is worth.

I am so sure that it is the contractors responsibility but could not find anything to support my position. Here is why I am so sure:

Contractor finds and hires subcontractors, he also has his own employees. Contractor gets all required paperwork from subs and has no doubt in his mind that he is responsible for his subs and has to answer to all third parties and pay, if any agency deems a sub not in compliance or the contractor not in compliance for that matter. These subs do not have a contract with A (my client who hired the contractor). Hence, they neither can be employees of A nor contractors of A nor does A actually have the obligation to pay them.

Subs are paid through loan funds, through a title company (lien waivers) but this is only done this way to protect the property. I strongly believe that subs are deemed to be paid by contractor. I just wished I could show something in writing.

[abby]

found this in the 1099-MISC instructions

Hope this helps:

Escrow agent; construction project. When an escrow
agent maintains owner-provided funds in an escrow account
for a construction project, performs management and
oversight functions relating to the construction project, and
makes payments for the owner and the general contractor,
the escrow agent must file Form 1099-MISC for reportable
payments of $600 or more. This requirement applies whether
or not the escrow agent is a bank. If the contractor is the
borrower of the funds, do not report on Form 1099-MISC any
loan payments made to the contractor/borrower.

[Gretel]

Hope this helps:

Escrow agent; construction project. When an escrow
agent maintains owner-provided funds in an escrow account
for a construction project, performs management and
oversight functions relating to the construction project, and
makes payments for the owner and the general contractor,
the escrow agent must file Form 1099-MISC for reportable
payments of $600 or more. This requirement applies whether
or not the escrow agent is a bank. If the contractor is the
borrower of the funds, do not report on Form 1099-MISC any
loan payments made to the contractor/borrower.

Thank you so much, Abby. I actually looked at the instructions today but overlooked this. I am not quite clear what this means in practicality since the title company doesn't really have management or oversight functions. The bank tells them who and how much to pay. What seems to be clear is that the owner is not the one doing the reporting.

Initiated are these payments by the contractor. In that sense the contractor has control over the funds even though they are not in his name.

[ATSMAN]

I guess we all missed that little exception!

[taxea]

Look at it from a logical common sense view
A hires contractor who is an IC...if the work being done is for A's business then A issues 1099 to contractor. It is common practice for the general contractor to sub contract certain work or even all work and at the same time manage or supervise the work. If GC subs to IC's for any of the work then GC is responsible to issue the 1099's. GC is responsible to A to see that the job gets done. How is the GC going to justify the IC's as an expense of the job if he doesn't issue the 1099's? The ICs are the GCs expense not A's expense.

[Gretel]

Common sense

is not a black and white issue

Contractor does not get paid for the whole project, only for his supervision and his employees.

Funds come from bank (loan in A's name)

Title company issues checks after getting list of payees from bank plus funds to pay, with their name on it since a mechanic lien needs to be avoided at all costs.

The only person who has control of subs is contractor, he is also the one being responsible for them and paying them BUT he is not literally the person actually paying them. Here is were the "Escrow Agent" comes in and common sense. Would there no be the issue of mechanic liens, I am sure bank would give funds to contractor so he could pay everyone.

All confusion clarified?