Paying Contractor in Cash?

[Timothy Peck]

Hello.  I am doing some excavation work and the contractor has requested to be paid in cash (two payments totaling $7300).  It is a small town and I know him so although there is some concern that I will be left with an incomplete job and out the cash, my bigger concern is being able to prove the expense if audited.

He mentioned that he has a contract for me (and him) to sign and I will of course request and invoice but should I also cover myself by creating additional paperwork to be signed?  If so, what would that be?

Any advice would be greatly appreciated.

[Jon Holdman]

Have him complete an IRS from W-9 so that you have his taxpayer information.  Then, be sure to send him a 1099-MISC by the end of January of the next year documenting the payment.  You also send a copy of the 1099-MISC to the IRS.  You will use your copy to document the payment you made to him and he will use his copy to document the payment he received.

You need to do this with every contractor that you pay $600 or more to during the year.