This question was from Peter:
Question
Hi, I am a self employed roofer. Occasionally I have to employ labourers to help out on certain contracts. I pay 20% tax on my earnings . Can you advise me on how I should be paying these men? Do I deduct tax from them and if so, how do I let the inland revenue know? Also , if their payment comes out of my earnings, what do I have to declare to the taxman. At the moment, I am paying them cash and they are responsible for paying their own tax, but don't know if this is happening!. Also the taxman doesn't know that some of my earnings are to pay for work done. I have only been entering monies spent on materials when I have done my tax return, but I am sure there is a better way around this. Is there any way you can help me with these questions, please?

Answer
Hi Peter thanks for the great question!

You first start off by asking how to pay your *independent contractors.That my fellow entrepreneur, is solely your decision,but it is advisable that you pay with a company/business check. This way you have proof you paid this individual and also have it for tax purposes at a later date.

If they were employees you would be deducting tax and social security from their checks. When you file taxes with the IRS as a business you will need to file with a 1099 form. You will include information like the wages you paid your independent contractors on this form.From your language used I am gathering that you are new to business since you wrote "Also, if their payment comes out of my earnings" take note that nothing is YOUR earnings.It is your business' earnings and the business pays you a wage or salary. It is common that in the first years of business the business owner might not even get paid in order to afford labor and materials costs until there is real cash-flow.

Paying your additional workers cash is risky in the sense that when people get paid cash they think of it as "free money" that they don't have to claim on their taxes. Which means if you say you paid these individuals on your business' 1099 and they don't claim it on their 1040 tax form things can get sticky with the IRS for them and possibly you. From my understanding you too are filing a 1040 form which means your business structure is more then likely a sole proprietorship. I find this structure to leave you especially a person in the roofing business to be very vulnerable to lawsuits and the like which can deeply effect not only your business' assets,but your own personal finances as well. To help prevent such hazards I recommend in incorporating and hiring an accountant/CPA. If you take head to my advice make sure you follow all rules of incorporation to a tee and do not commingle funds ever, so as not to leave an opening for anyone to pierce the corporate veil.

Incorporating may cost you up front, but it will help
you save in the long-term as expenses like your vehicle, and medical costs can be written off. I fear I am going a little ahead of where you are right now so please look into the resources I offer below. I've listed two books that I
consider personal bibles to business as well as my business site. You are always welcome to ask me more questions in the future, but my company offers services that will give you experts in the legal, and financial fields as well as advice from insiders in your industry.

* Legal definition of Independent Contractor-one that contracts to do work or perform a service for another and that retains total and free control over the means or methods used in doing the work or performing the service.

Resources that can help you:

Straight from the horses' mouth

http://www.irs.gov/businesses/small/article/0,,id=179115,00.html

My site- I suggest you look into getting the Legal Plan for the Self Employed as well as the Standard GoSmallBiz Toolbox

http://www.nicolebienfang.com

Books:

http://www.amazon.com/dp/B000FA5QEk/?tagchicago06e20

http://www.amazon.com/dp/B001OXCERE/?tagchicago06e20

I hope this helps, may your future be prosperous!

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