Paid a Subcontractor in Cash, No Receipt: Deduction and 1099

Can I still deduct a subcontractor I paid in cash with no receipt?

A cash payment to a subcontractor is deductible when it was an ordinary and necessary cost of the business and the records prove it. The tax code allows a deduction for reasonable pay for services actually performed, and the regulations require books and records sufficient to establish each deduction. Except in a few cases, the law requires no specific kind of record, so a receipt is one way to prove a cost, not the only way. But the proving is your job: the IRS says to keep adequate records or have sufficient evidence to support your own statement, and that you generally must have documentary evidence such as receipts, canceled checks or bills (IRS: burden of proof). With cash, the other records have to carry the claim.

Cash is the weak spot, not the rule. The IRS says supporting documents for an expense should identify the payee, the amount, proof of payment, the date and the service received, and that more than one document may be needed. A cash payment leaves no statement line to show who got the money. The payment date also matters: on the cash method the cost is generally deducted in the year paid, and the 1099 follows the same year.

A cash case is not simple when:

• the cash is large or repeated, or went to several subs or across several years;
• you have no name, address or tax ID for the sub, or cannot find the sub;
• the cash came from customer payments you never deposited, so the books do not tie to the bank;
• the people you paid work on your schedule, with your tools, for months (see the worker-status section below); or
• a return already claimed the cost, or the IRS or your state has asked you to prove it.

Gather first:

• bank and ATM statements for every account that could have supplied the cash;
• the job list: contract, bid, change orders, schedule, permits, photos;
• every name, phone number and address you have for each sub, and any W-9 or invoice;
• texts, emails and call logs about price, dates and payment.

What can I use as proof when there is no receipt?

Build a file of records that agree on who was paid, how much, when and for what (IRS: records).

For a cash payment with no receipt, the IRS says you should make an adequate explanation in your records at the time of payment. A statement the sub signs now is a record made later. It can still help; pair it with the withdrawals, the job record and the messages, and keep it dated. The IRS sets no list of accepted substitutes for a cash receipt, so a payee's signed statement is evidence, not a safe harbor; how much weight it carries depends on the facts and the rest of the file.

For lost receipts in general, see lost receipts for business expenses. For what a receipt must show, see IRS receipt requirements.

How do I record the payment, and why must I never create or back-date a receipt?

Record each cash payment on its own line, on the day you pay, and never create or back-date a receipt. The line holds the date paid, sub's name, job, amount, what the work was, and where the proof is kept. Describe every record as what it is. If a record was rebuilt, say it was rebuilt and when.

1. If the cash came from a business account, book the withdrawal as a transfer to a cash-on-hand account, so the bank statement still ties out.
2. If the cash came from customer payments you never deposited, record the full customer payment as income and the sub payment as a separate cost. Do not net one against the other; all income you receive counts.
3. Book each payment from that account as contract labor, or as the job's subcontractor cost, dated the day it was paid.
4. Put the sub's name, address, job and the proof file in the memo. If you are entering the payment now, keep the day it was paid as the transaction date, and note the day you made the entry and that it was rebuilt from the records listed.
5. If the cash came from your own pocket, not a business account, record it as an owner contribution or reimbursement; see fixing commingled business and personal funds.

A sole proprietor generally reports contract labor on Schedule C, line 11, unless the cost is deducted elsewhere, such as in cost of goods sold. Partnerships and corporations deduct it on their own returns under the same proof rules. For job costs, see construction job costing.

Never back-date a record: willfully giving the IRS a document you know is false in a material way can be a crime under section 7207. So can signing a statement under penalties of perjury that you do not believe is true, under section 7206. A statement that says "written on this date, from these records" is an honest record of the gap; it does not by itself make the deduction allowable.

Does paying in cash change my 1099-NEC duty?

No. Form 1099-NEC turns on what you paid and why, not on how. You generally file it for each person who is not your employee and whom you paid, in the course of your trade or business, for services (including parts or materials the person supplied when that was incidental to the service), once the payments reach $2,000 in the year (IRS instructions). Earlier payment years used a threshold of $600. The form is due February 1, 2027 for payments made this tax year.

Payments to a corporation, including an LLC taxed as one, generally need no Form 1099-NEC. Who gets a form, and how card, app and network payments are treated, is covered in which contractors get a tax form. States can add their own contractor reporting; this page covers the federal rules.

A sole proprietor's Schedule C asks whether the business made payments that required Forms 1099 and whether it filed or will file them. A missing form does not by itself decide the deduction; see late 1099s and penalty relief.

I have no tax ID or can't find the sub. What do a W-9, backup withholding and the filing penalty mean?

With no tax ID, you generally must hold back 24% of a payment that needs a Form 1099 and send it to the IRS, and a missing or late form can cost a penalty per form. A W-9 collected before you pay is how you get the number both need.

• W-9. Form W-9 gets the sub's correct tax ID (a Social Security number, ITIN or EIN) for the form. For the penalty reasonable-cause test (a good-faith reason the IRS may accept for relief), the IRS looks for a request made when the relationship starts, oral or written, and annual requests if the number stays missing (Publication 1586). A sub who will not give one is covered in collecting tax IDs from contractors.
• Backup withholding. With no tax ID, backup withholding may apply: the payer must withhold 24% of the payment (IRS: backup withholding). The same threshold governs withholding (IRS instructions). Under section 3406(b)(6), it starts with the whole payment that brings the sub's total for the year to $2,000 and covers every later payment, or with the first payment if you had to file a 1099 for, or withhold from, that sub the year before. For pay like a subcontractor's, there is no waiting period even if the sub says a number is on the way. A payer who did not withhold may be liable for the amount not collected, so a full cash payment made without a number can leave the payer owing the tax. The IRS can excuse the tax, not penalties or interest, if the sub reported the income and paid the tax on it, proved by a Form 4669 the sub signs (section 3402(d)); a sub you cannot find cannot sign it. Deposits, reporting and that relief are in collecting tax IDs from contractors.
• Filing penalty. A late, missing or incorrect Form 1099-NEC is penalized per form filed with the IRS, and separately for the copy due to the sub. For forms due next filing season the amount runs from $60 per form or copy when fixed within 30 days to $340 when fixed after August 1 or never filed, and is higher when the failure is intentional (at least $690). Reasonable cause can reduce or remove it; amounts and relief are in late 1099s and penalty relief.

I have the tax ID but can't find the sub

If the sub gave you a tax ID but you cannot reach the sub now, the form can still carry the name, address and number you have; keep the message or note that shows where the number came from. A wrong number can draw its own notice and penalty; collecting tax IDs from contractors covers checking one. If you know the name and address but have no number, file the 1099-NEC by the deadline with the tax ID box blank (IRS general instructions); a missing number can still draw a penalty. Record each attempt to reach the sub (date, method, result) and keep the log in the proof file. The instructions tie the filing duty to the payment, not to reaching the sub. The form calls for the recipient's full name and address, and the instructions do not say what to file when you know only a first name and a phone number; get help before the deadline.

What does the sub owe, and does the sub's reporting change my deduction?

A sub who is an individual or sole proprietor generally owes income tax on all income received for the work, whether or not anyone files a 1099, and self-employment tax on net earnings (Publication 334); a corporation reports its own income. A sub who had tax withheld claims it as a credit on a return.

The sub's reporting does not decide your deduction; your records do. The two are still linked: the IRS uses the form to check whether the recipient reported the payment, and filing puts the payee and amount on record.

Paying cash does not make you file Form 8300. That form is filed by a business that receives more than $10,000 in cash in one transaction or related transactions (IRS: Form 8300). If a customer paid you that much in cash, it is yours to file, by the 15th day after you received the cash (instructions).

When does a cash-paid subcontractor look like an employee?

When you control when, where and how the work is done, or the person works for you steadily at the core of your business. Cash does not change that: pay may be in cash or other forms, and status turns on the relationship. The IRS looks at behavioral control, financial control and the relationship, with no single deciding fact (Publication 15-A).

If you treat an employee as a contractor without a reasonable basis, you may be liable for employment taxes for the worker, plus a penalty. That can be a larger exposure than a missing receipt. Section 530 relief requires that the required 1099s were timely filed, the Voluntary Classification Settlement Program that all required 1099s were filed for the previous three years, and the reduced liability rates in section 3509 double when they were not filed, unless the failure was due to reasonable cause. If the failure to withhold was intentional disregard, section 3509 does not apply and the reduced rates are lost. Fixing status, back filings and relief are in contractors who may be employees. State tests can differ from the IRS test.

What should I change from now on?

1. Get a W-9 before the first payment. Keep it in a file for each sub.
2. Get a written invoice or signed job agreement with the sub's name, address, scope and price.
3. Pay by check or bank transfer from the business account. The IRS advises paying by check to document business expenses, and a statement shows payee, amount and date.
4. If cash is unavoidable, have the sub sign and date a payment slip when you pay, and write the explanation in your records that day.
5. Keep a payment log by sub: date, job, amount, method. Total it per sub each December and compare it with the $2,000 threshold.
6. File the 1099-NEC on time and keep the file for as long as the records may matter; see how long to keep business records.

Example

These examples are illustrative and use US dollars.

A framer paid $4,000 in cash

A deck builder paid a framer $4,000 in cash, in one payment and with no W-9. The builder knows only a first name and has no receipt. The file: ATM withdrawals on matching dates, dated job photos, texts with the price and the day of payment, the builder's own invoice to the homeowner, and a signed statement if the framer can be reached. The payment is above the 1099 threshold, so a Form 1099-NEC is generally due unless the framer is a corporation, and backup withholding may have applied: 24% of $4,000 is $960. The form calls for a full name and address and allows a blank tax ID box; with a first name only, the builder logs every attempt to reach the framer and gets help on how to file before the deadline.

Three subs paid $2,500 each

A landscaper paid three subs $2,500 each in cash during the year, with no W-9s. Each total is above the threshold, so a Form 1099-NEC is generally due for each sub unless the sub is a corporation. With no tax IDs, backup withholding may have applied. If each sub got one $2,500 payment, 24% of $2,500 is $600 per sub, or $1,800 in all, which may be owed if it was not withheld; with smaller payments, withholding generally starts with the whole payment that reaches the threshold, or with the first payment if a 1099 or withholding was required for that sub the year before. Whether the subs' own reporting supports relief, and how to answer a penalty notice, are in late 1099s and penalty relief.

One worker paid $18,000 over eight months

A remodeler paid one worker $18,000 in cash over eight months, on a set weekly schedule, using the remodeler's tools and instructions. These control facts point toward employment. If status is in question, that question is larger than the missing receipt. The remodeler rebuilds a payment history by week, reviews all three IRS categories, and checks whether any 1099s were filed, because that affects the settlement program and relief options in contractors who may be employees. Calling the worker a subcontractor does not settle status.

Different for you?

• The cash is large or repeated, you cannot find the sub, or several subs or years are involved: what proof can still be built, which years to rebuild first, and whether 1099s or backup withholding were due are judgment calls on your facts; get bookkeeping help.
• Customer cash was used to pay subs and never deposited: the income and the cost both have to be recorded, year by year; get bookkeeping help to rebuild the books.
• The people you paid look like employees: fix worker status first; see contractors who may be employees and get bookkeeping help to rebuild the payment history.
• 1099s were never filed for one or more years, or you got Notice 972CG: see late 1099s and penalty relief. If cash went to several subs or across several years, the payment history has to be rebuilt first; get bookkeeping help.
• A sub will not give a W-9 or tax ID, or you cannot find the sub: see collecting tax IDs from contractors. Whether backup withholding was due on payments already made turns on your payment list; get bookkeeping help to build it.
• The IRS or your state has asked you to prove a cash cost: see lost receipts for business expenses for what to send, and get bookkeeping help to assemble the file before you reply.
• You are not sure the sub needs a 1099 (a corporation, card payments): see which contractors get a tax form.
• You are in California: the state uses its own worker-status test, which can differ from the IRS test; see the California ABC test. A payer that must withhold federal backup withholding must also withhold for California, with limited exceptions (FTB); see collecting tax IDs from contractors.
• You pay subs outside the US: see paying contractors abroad.
• A filed return already claimed a cost you cannot support: see amending a return for business expense mistakes and get bookkeeping help to rebuild the year.
• You are a partnership or corporation: the entity files the 1099s and owes any backup withholding it should have taken. A sole proprietor owes it personally, and general partners are generally liable under state law for partnership debts (IRS manual). An owner, partner, officer or other person who controlled payment can owe the section 6672 trust fund recovery penalty if the failure to collect or pay was willful (Form 945 instructions), generally assessable for three years after the later of the following April 15 or the Form 945 filing, with no limit if none was filed (IRS manual). See late 1099s and penalty relief, and get bookkeeping help if the records have gaps.