Win-win. He gets a business deduction - she gets a means to prove an income for car loans, rent etc.
Originally Posted by mtabsw
This might work fine if the provider knows upfront that she is going to have to pay income taxes on the 1099 reported income. Let's say the business owner pays her $7,200 for the year (2 sessions per month at $300 each; math is the same for additional sessions).
The income tax becomes a bit murky here. Assuming the provider is at a 25% tax bracket (due to other outside income) she will need to pay the IRS $1,800. However, if this is all of her declared income and she has kids Earned Income Credit may kick in. I am not a tax expert so my point is that there may be positive and negative consequences.
I do think that some (maybe most?) providers live in the invisible economy of cash and debit cards. This approach would allow them to build up an income / credit history. The business owner would be required to show that the expense was a legitimate business expense but that is easily overcome.
Also, the business owner knows that any protection of anonymity is foregone with this approach. Any partners / SO / banking / lending may be visible with this approach.