I run a very small web design business and file taxes as
self-employed. Recent residences include NY and MN.

I subcontract people once in a while to do parts of the work on sites,
eg. programing. I issue them 1099s.

One of the questions I recently had for my accountant is how much of
the amount in the 1099s can I write off?

She seemed to think it was a percentage, but this makes no sense to me
that if I'm handing over -- say $1000 to someone -- that I am paying
tax on this amount, as they themselves are self employed people who
are filing their own taxes.

If I had to pay taxes on their earnings (ie. was not able to write off
100% of the amounts I was paying the 1099ers) then we'd both be paying
taxes on the same amount.

Can anyone clear this up?

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Clarification of Question by nywebmonkey-ga on 19 May 2006 14:30 PDT

We don't create software, or a product. We sell web design services.
The final site is not owned by the client, but licensed in perpetuity
because the design are a form of intellectual property.

All the payments I am inquiring about are for professional services, not products.

Howdy nywebmonkey-ga,

This is really straight forward.

Your subcontractors are what is called "contract labor" and you enter the
total amounts paid on Schedule C tax form, Part II, Line 11.
http://www.irs.gov/businesses/small/article/0,,id=115043,00.html

"As a self-employed individual (someone who owns an unincorporated business)
or an independent contractor, you are required to report income and expenses
on a Schedule C ..."

Here is a link to the Schedule C form.
http://www.irs.gov/pub/irs-pdf/f1040sc.pdf

- Schedule C - Profit or Loss From Business (Sole Proprietorship)
 - Part II - Expenses
  - [Line] 11 - Contract labor

Here are the instructions for Schedule C and the applicable section.
http://www.irs.gov/pub/irs-pdf/i1040sc.pdf

"...
Line 11

Enter the total cost of contract labor for the tax year.
..."

If you examine Schedule C, you will see that the above expense is subtracted
from the gross income of the business, just as you would subtract the cost
of your office supplies and other allowable expenses of your business.  This
is not to imply that these talented people are comparable to office supplies.

You will want to make sure they are considered subcontractors, but if they
work out of their own offices or home, set their own hours, use their own
"tools," etc. then they would generally be considered subcontractors and not
employees.  This "Dollar Stretcher" article, "Contractor or Employee?" by
Tammy Harrison has more on this topic, with an example of a subcontractor.
http://www.stretcher.com/stories/01/010212p.cfm

"A baker is given an order for a birthday cake. The specifications and name
are given, along with the flavor of cake that the customer wants. At this
point, the customer has to step back, relinquish control and allow the baker
to use her skills and expertise to complete the cake."

If you need any clarification, please feel free to ask.


Search strategy:  Personal experience of running an internet business (web
hosting) that used subcontracter web page designers and programmers.

Looking Forward, denco-ga - Google Answers Researcher

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Request for Answer Clarification by nywebmonkey-ga on 26 May 2006 10:27 PDT

denco-ga,

Thanks so much for this answer and the wonderful detail of your response.

Just to dumb it down for me a little more, are you saying that if I
give a contractor $1000 and report it properly (as you explain), I do
not pay tax on **any** of the amount I give to them?

Thanks.

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Clarification of Answer by denco-ga on 26 May 2006 15:15 PDT

Howdy nywebmonkey-ga,

Yep, you got it.  It is an expense to your company, and as such, it reduces
your income from the business by that amount, and as such, you would not pay
any taxes on it.  They, as independent contractors, are responsible for their
own taxes.  Just keep issuing them a 1099 as you have been issuing.

Looking Forward, denco-ga - Google Answers Researcher

Very detailed and helpful answer.

Is it a cost to create a product or a service to maintain a product already sold?

Sounds like a cost of goods sold.

When Bill Gates hires serfs to create windows blah blah I wondor how he does the
figures.  You can't very well write off all the expense of creating a
product sold to millions of people against the first copy sold.

How many customers use the efforts of  your 1099 workers?

Be interesting to see what the answer is.

My pleasure nywebmonkey-ga, and much thanks for the 5 star rating.

Looking Forward, denco-ga - Google Answers Researcher

Denco, your answers are always a pleasure to read. They are
informative, well organized, and always accurate. A tip of the hat to
you, sir (or madam).

Much thanks for the kind comment, magnesium-ga!

Looking Forward, (sir) denco-ga - Google Answers Researcher