Selling a Business – Subcontractor Paperwork

Dear M & M:

The time has come to sell my business what do I need to do?

— Lorraine

Dear Lorraine:

Items you will need are:

• Business tax records

• Revenue records

Step 1: Gather all of your business revenue records and tax returns for the last several years. Prospective buyers will want to see how much money the company has made throughout the years. Simply providing records for the past year or two will probably not be enough — be sure to include at least three years of records, preferably more.

Step 2: Hire an independent appraiser to value your business. An appraiser who is a Certified Public Accountant (CPA), or who has experience determining the value of businesses, is the best choice.

Step 3: Hire a business broker to help you market and sell your business. Your attorney can help you find a qualified broker. Selling a business is a very specialized endeavor, and it is helpful to have expert help to make the sale and structure a sales agreement.

– M & M

Dear M & M:

I am so confused on what a subcontractor must provide me as far as paperwork. Could you review some of the forms with me?

— Stephen

Dear Stephen:

Tax guidelines require businesses to report the amount paid to subcontractors during the year on the annual tax return.

To report the amount paid, the business submits the total paid along with the subcontractor’s federal ID number. In most cases, a subcontractor provides this information before performing work but sometimes a subcontractor may fail to submit this number to a business. When this happens, a business may resort to different means to obtain the proper ID number for its yearend tax return.

Form 1099-MISC: Businesses paying for services from people who are not employees report these payments on a 1099-MISC form. This form is for payments in excess of $600 paid to third-party providers.

Payments for inventory, shipping costs, communications, and storage do not fall under the IRS requirements for this form. In addition, payments to a corporation or tax-exempt entity are exempt from this requirement. The deadline for completing this form and mailing it to the subcontractor is Jan. 31 for the previous tax year.

Some examples of services that are reported on the 1099-MISC form include attorney fees, accountant fees and landscaper fees. A copy of the form must also be sent to the IRS before Feb. 28.

Obtaining the Federal ID Number: Before contracting for services from a subcontractor, a business obtains the federal ID number by requesting a W-9 form. The W-9 form lists a business name and DBA (doing business as) name and address. There is also a place for the subcontractor to provide her federal ID number. This number can be a Social Security Number or an Employer Identification Number.

If a subcontractor is paying employees, she likely will have an EIN number. The request for a W-9 can either be a formal written request or a verbal request. A good business practice is to request the W-9 before contracting the work, though instances occur that may make this difficult.

Options: To maintain compliance with IRS guidelines, a business must make a formal request to a subcontractor for his identification number if it does not receive it initially. The request must be made before the end of the year.

If the subcontractor ignores the request, the business must begin backup withholding on payments.

If the ID number is still missing at the time of filing for the 1099 form, then the business will leave the box empty but still submit the report to the IRS.

The IRS will send a notice stating that the number is missing. According to IRS guidelines, this notice must be sent along with a backup withholding notice and W-9 form to the subcontractor.

This notifies the subcontractor that he will be subject to withholding until he submits his identification number.

Other Resources: The responsibility of tracking notifications sent to the subcontractor is left to the business, so it is important to keep records showing dates of requests.

It is also important to start withholding immediately after receiving the notice from the IRS regarding the missing identification number. If you no longer use the subcontractor, the IRS requires that you send a request for the identification number for three years after the first notice of missing ID number is received. Another option for obtaining a federal ID number is to perform an online search. Online companies charge a small fee for providing federal ID numbers on existing businesses.

– M & M

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