Q. (cont.) Our construction team asked that we issue the check in both the contractor’s and sub-contractor’s names, so that both parties will need to endorse the check for deposit. Do you have any suggestions on how to handle this situation?
A. It is correct that a two-party check requires signatures of both parties in order to be cashed or deposited. It insures the subcontractor’s participation in the payment! But it complicates the payment for AP.
The construction team wants to ensure that the sub gets paid, and avoid having the sub put a lien on the project, which they may do if they are not paid (lien laws vary by state). We don’t have data on how common the practice is, but it is not unusual. Another solution is to pay the subcontractor(s) directly.
As far as vendor master setup and 1099 reporting in a two-party check situation, it depends on whether you know the allocation – what part of the payment is the contractor’s and what part the subcontractor’s. If you are sending checks directly to the contractor with no indication for how the funds are to be allocated between the contractor and the subcontractor, then you would not need to create an additional vendor record for the subcontractor.
If you know and indicate the allocation, then you will need to set up the sub in the vendor master and 1099 them as well as 1099 the contractor.
But if you don’t know and just issue the two-party check to the contractor, then in your vendor file you can add the subcontractor as an additional remit-to name on the contractor file record, and you only have to issue a 1099 to the contractor as the principal payee. The contractor, as middleman, will then have to report the amount paid to the subcontractor. We’ve confirmed this in the past with the IRS.