Independent Contractors Beware

If you are an independent contractor you need to beware of a very dangerous pitfall. The pitfall I am referring to is making the decision to pay your subcontractors in cash and not report their earnings to the IRS. The consequences of not doing this can be quite severe especially if you have not filed your tax returns in quite a while. Consider the following story.

Bob, an independent contractor, has not filed his taxes in a while. In 2005, one of the unfiled years, he had a job that paid $250,000. He hired 5 subcontractors and paid each one $30,000 in cash and did not report this to the IRS. He paid an additional $60,000 for materials and various other expenses. All in all Bob received $250,000 and paid out $210,000 (5 subcontractors at $30,000 and $60,000 in materials and expenses). He did not do any work other than broker the deal for which he made $40,000. Not bad!
In 2009 the IRS sends Bob a HUGE tax bill listing his income as $250,000. With penalties and interest his tax bill is nearly $75,000! He says, “Wait a minute, I only made $40,000, not $250,000. I paid some guys to do most of the work.” The IRS says, “Prove it.” He can’t. He’s in deep trouble and needs a tax professional. Independent contractors beware! Don’t fall into this trap!