Can I Claim Tax Deduction for Hiring Day Laborers in My Business?

But wouldn't the day laborers need to fill out a W-9 form or something? And don't you have to issue them 1099s if you pay them more than $600 in a year? I thought the IRS was super strict about that stuff.

Technically, yes - for any independent contractor you pay $600+ in a year, you should have them complete a W-9 and issue a 1099-NEC. However, with day laborers you're using once or twice, you likely won't hit that $600 threshold per person. For the documentation issue, the IRS requires you to keep adequate records to prove business expenses, but there's some flexibility in what constitutes "adequate." Your goal should be to create a paper trail showing the expense was ordinary and necessary for your business. Even if you can't get formal documentation with SSNs, creating your own receipt system is better than nothing.

How exactly does that work with cash payments though? Like does the IRS actually accept that kind of after-the-fact documentation? Seems kinda sketchy tbh.

Did they help you get actual tax IDs from the workers or is it just creating receipt records? I'm confused about how this solves the 1099 issue.

For cash payments, they don't do anything sketchy - they just help you create the proper contemporary records the IRS actually requires. Basically, you need to show: 1) the expense occurred, 2) it was business-related, and 3) the amount. Photos, detailed notes, and your business calendar can establish this. The IRS doesn't actually require you to have W-9s for every single day laborer - that's a common misconception. They don't magically get tax IDs from workers after the fact. What they do is help you document the nature of your relationship with these temporary workers correctly. For truly occasional laborers (used once or twice), you generally don't need 1099s. They help identify which workers might cross that threshold and need proper documentation versus truly one-time help.

Wait, this sounds like bs. You're saying there's some service that magically gets you through to the IRS when nobody can get through? How does that even work?

Even if you got through to the IRS, wouldn't they just tell you that you need proper documentation for ALL workers? I don't see how they'd give you a free pass on this. The tax code is pretty clear about needing to issue 1099s.

It's not magic - they use technology to navigate the IRS phone system and secure your place in line, then call you when an agent is available. It's completely legitimate - they just automate the waiting process so you don't have to stay on hold for hours. The IRS agent didn't give me a "free pass" - they clarified the actual requirements. For true one-time day laborers paid under $600, you don't need to issue 1099s. You do need basic documentation of the expense (date, amount, service provided). For workers you use repeatedly or pay over $600 annually, then yes, you need their information and to issue 1099s. The agent was helpful in explaining the distinction and what documentation would satisfy an audit.

That's actually a really smart idea! I could definitely set up a separate account or cash box just for labor expenses. Would keeping something like a small notebook where I write down the date, worker's first name, job location, and amount paid be sufficient? Should I try to get them to sign it somehow?

Yes, a small notebook would work great. Date, name, location, hours/job description, and amount paid are the key things. Getting a signature is ideal but not always practical with day laborers. Take photos of the job site with workers when possible - that adds another layer of documentation. My accountant also suggested taking a photo of the cash before paying it out, with a note showing the job details. Basically, you're creating your own paper trail since these workers don't provide documentation. Just be consistent with your system and make sure the expenses are reasonable for the work being done.

You're playing with fire doing that with no documentation. The IRS specifically looks for businesses deducting labor without proper backup. Yes it's a legitimate expense but you need SOME kind of records. One audit and you're toast if you have zero documentation.

I'm not saying I have zero documentation - I keep a detailed job log with dates, job sites, number of workers, hours, and amounts paid. I just don't collect all their personal info and SSNs for one-time helpers. For regular subcontractors I absolutely get W-9s and issue 1099s. The key is being reasonable with the amounts and having SOME documentation of the expense. My tax guy said the IRS mainly looks for people claiming absurdly high labor costs compared to their revenue or industry standards. If you're claiming legitimate expenses and have basic records, you're generally fine.

This is really helpful clarification! I think I've been overthinking this whole thing. So if I understand correctly, as long as I'm consistent about documenting the basics (date, amount, work done, worker acknowledgment) and I'm not paying any individual worker more than $600 in a year, I should be okay to deduct these as legitimate business expenses? I like the idea of matching my ATM withdrawals to specific jobs in a log. That seems like a practical way to create a paper trail for past expenses. Going forward, I'll definitely start having workers sign simple receipts and maybe take photos of the work sites. One more question - do you think it's worth setting up a separate business bank account just for these cash withdrawals? Would that make the documentation cleaner for tax purposes?

Yes, you've got it exactly right! The key is consistency and showing good faith effort to document legitimate business expenses. A separate business account for cash withdrawals is actually a brilliant idea - it creates a much cleaner paper trail and makes it obvious that these withdrawals were for business purposes rather than personal use. I'd also suggest keeping a small notebook or using a phone app to log the details right when you pay the workers, rather than trying to reconstruct everything later. The closer your documentation is to the actual transaction, the stronger it looks if you ever get audited. One tip from my experience - if you're at the same pickup location regularly (like that hardware store parking lot), you might start recognizing some of the same workers. If you end up using someone multiple times throughout the year, just keep a running tally of what you've paid them so you know if you're approaching that $600 threshold where you'd need their tax info.