Legal Question in Business Law in North Carolina
Business Operation
I am in the Electrical Contracting business. I operate the business on a part-time basis. Were I to have an individual, who also an electrician, however who is not licensed, do subcontracting work for me (and I inspected his work at the end of each job to comply with my states requirements) and I paid him money for the work he performed and I kept the balance and reported only the balance as income on my taxes would I be operating and report- ing legally. For example, if we took on a job to wire up an apartment and he purchased all the materials in his name (the subcontractor) and at the end of the job I inspected the work, collected from the owner of the apartment, paid the subcontractor the agreed upon amount and kept the balance, would this be operating within the law. In other words, would all of this be legal? Would he be considered a sub in this scenario, legally? Would this make the IRS happy?
2 Answers from Attorneys
Unlicensed electrical sub-contractor
The IRS will want you to report the gross contract amount, then deduct the payment to the other person as sub-contract expense, W-2 wages, or what-have-you. The problem you may run into is that, if you are using this guy on a regular basis, the IRS may come back in SEVERAL YEARS LATER and assess you for employment taxes. And they won't assess you for just you 1/2, they'll assess you for BOTH your part and the employee's part. And the IRS will probably win (along with penalties and interest), especially if this "sub-contractor" does not have the proper license(s) to act as a subcontractor. Of course, I don't know the whole story in your case, but it sounds like you could be in real trouble with the IRS, not right away, but down the road. And I haven't researched what NC penalties might be for using an unlicensed sub-contractor. It's sounds to me like you'd better think twice! If you only do one job with him - ever - you MIGHT (and I emphasize MIGHT) be OK. If you use him more than once, you could be in deep. I have actually seen this happen.
A couple of issues intertwined.
The IRS won't be solely concerned with whether he's licensed or not; the question of whether he's a sub or an employee has more to do with the nature of your BUSINESS relationship and that's only one of many factors. If you write back to me, I'lltry to find the website which asks you a mess ofquestions and then tells you whether you should be using payroll vs. 1099.
Your state may or may not allow such delegation ofduties, and could perhaps revoke YOUR license ifyou're ignoring their rules. They may require veryclose supervision for HIS safety; they may only allowthis kind of delegation in an apprenticeship situation,e.g., he may need to be taking courses or otherwisetaking steps to get his license.
If he's alien, you might have other employment issues to consider, too. I know an electrician like that.
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