Q: What is tax Form 1099, and am I in compliance?

The last few years have created a lot of confusion among landlords and small business owners who have significant payments to contractors.

Originally, the Affordable Care Act required all small businesses including landlords to file Form 1099s if they made any payments to contractors in amounts greater than $600 – a requirement that understandably caused great weeping, wailing and gnashing of teeth.

Why?

Because it increased the time, effort and cost of tax compliance significantly for the very small business or small landlord.

Once you start issuing Form 1099s, unless you’re already incorporated, you have to run around policing up all your independent contractors’ taxpayer ID numbers and generate and mail the paperwork both to them and transmit the information to the IRS.

Fortunately for most small landlords, Congress blinked, and loosened compliance requirements for this population. But it’s important to understand whether you fit into this category, and what your responsibilities are.

The 1099 Requirement

The IRS is serious about tax compliance, and 1099 compliance is a cornerstone of that effort. The 1099 forms are their eyes and ears on the ground that alert them to businesses and contractors who are making money that should be subject to income tax.

The Small Business Jobs Act of 2010 actually more than doubled some of the penalties of failing to comply with 1099 rules.

Specifically:

If you fail to provide a required Form 1099 to a contractor, you could get slapped with penalties of $30 to $100 per form, up to a maximum penalty of $1.5 million. But that’s only for accidents and oversights. If the IRS believes you have willfully and intentionally violated the rules, your penalty increases to up to $250 per form, and there is no maximum penalty.

Deadlines

The contractors were supposed to receive their 1099s by January 31. The IRS wants their copy by February 28th.

The January 31 deadline is already past. But you can still hit the IRS deadline, which is the more important: They’re the ones who can fine you!

What If I Can’t Get the Taxpayer ID Number?

If you are obligated to send a 1099 to a contractor but they won’t give you their Taxpayer ID number, then you may face a requirement for backup withholding. That means you’ll have to withhold up to 28 percent of the amount due them and send it along to the IRS. This causes problems for contractors, naturally, as the 28 percent you must withhold isn’t just out of their profits. You also apply it to amounts paid for supplies and materials. Obviously, this can easily wipe out a contractor’s profit margin on a job – and that’s the point.

It can also wipe out a contractor’s motivation to complete in progress work for you, though, and that’s a problem, too.

Tip: This is why you should have the contractor fill out an IRS Form W-9 before work starts. Keep the W-9 in your files. The contractor must put his or her taxpayer ID number on the W-9. There’s no requirement to file the form with the IRS. Just have it in your records in case their agents question you about payments you made to them that you’re presumably deducting on your own tax return.

Who Must Provide 1099s?

This is where things can get murky. The IRS doesn’t expect every single landlord who just collects a rent check from one or two properties once a month and doesn’t do much else to send contractors Form 1099s. The IRS requires 1099s on non-corporate vendors paid $600 or more from any landlords “engaging in the business of renting property.”

Clear as mud? We think so, too.

Actually, a lot of people think so, so the IRS, pressed by a number of industry groups whose members were scratching their heads themselves, issued a clarification: The 1099 requirement would apply to ‘active’ real estate investors, but not to passive investors. That is, the 1099 requirement would apply to persons (in the broad sense of legal personhood, including individuals, corporations, trusts, etc.) who are ‘regularly and continuously’ engaged in the business of leasing or renting real estate for income or profit. 

If you are a real estate or property management professional and you are treating the rental income as ‘non-passive,’ you will likely have to issue 1099 MISC forms to the independent contractors who worked for you during the year.

Tip: Don’t want to get involved in Form 1099? Hire a property manager. In this case, the IRS releases the landlord from immediate responsibility for providing 1099 forms.

Applicability to Property Managers

If you’re in the property management business, guess what: You’re engaged in the business of leasing and renting real estate. That makes you an active participant in the business, while your client, the landlord, is generally a passive investor.

So you are subject to the 1099 requirement. That means you need to send 1099s to every contractor to whom you paid $600 or more last year – and send the copy to the IRS.

The IRS figures corporations should be able to document their own earnings. If you have contractors operating as sole proprietors, partners, or as single-member LLCs who elect not to file as corporations, you must comply with the 1099 requirement.  (Note, you must issue a 1099 if you paid at least $600 last year in legal advice, even if the law firm is a corporation. The IRS, apparently, doesn’t trust lawyers!)

If you withheld income tax from any person’s payments, you must also issue them a 1099 MISC, as well.

Do Landlords Receive 1099s?

Sometimes. Commercial payers of rents and royalties must generally provide a 1099 to the landlord and submit a copy to the IRS. But if you pay rent to a real estate agent, no 1099 is required for those payments. In this circumstance, however, the agent or supervising broker is responsible for issuing a 1099 MISC to the landlord for rents paid. Rental payments are noted in Box 1.

If the payment came by credit card, the landlord should not receive a 1099 from the payor. Instead, the credit card company should issue a 1099-K.

How do I account for sales taxes?

Per the IRS, if state or local sales taxes are imposed on the service provider and you (as the buyer) pay them to the service provider, report them on Form 1099-MISC as part of the reportable payment. However, if sales taxes are imposed on you (as the buyer) and collected from you by the service provider, do not report the sales taxes on Form 1099-MISC. ‘

Other advice

Smart landlords and property owners will track amounts paid for materials and supplies separately from other payments to vendors. Goods and services should be tracked and accounted for separately, even if from the same contractor.

It’s also important to track services and supplies to your personal property/residence separately from your investment properties.

Get taxpayer ID information before paying the vendor. Better yet, I would recommend not doing business with anyone not willing to give you a taxpayer ID number or Social Security Number. If they aren’t up and up with the IRS, they are likely cutting corners on permitting, insurance and workers compensation. This way lies disaster.

Further Reading

The IRS has published its 2015 instructions for Form 1099 MISC here.