Filing a 1099-MISC May Now Apply to Landlords. Are You Collecting the Needed W-9s?

Article Highlights:

• $600 Threshold 
• Exceptions 
• Form W-9 
• Impact of Tax Reform 
• 1099-MISC Filing 

If you use independent contractors to perform services for your business or your rental that is a trade or business, for each individual whom you pay $600 or more for the year, you are required to issue the service provider and the IRS a Form 1099-MISC after the end of the year, to avoid losing the deduction for their labor and expenses. (This requirement generally does not apply to payments made to a corporation. However, the exception does not extend to payments made for attorney fees and for certain payments for medical or health care services.)

It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later and have the total for the year exceed the $600 limit. As a result, you might overlook getting the information needed to file the 1099s for the year. Therefore, it is good practice to always have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services. Having a properly completed and signed Form W-9 for all independent contractors and service providers will eliminate any oversights and protect you against IRS penalties and conflicts.

The government provides IRS Form W-9, “Request for Taxpayer Identification Number and Certification,” as a means for you to obtain the data required from your vendors in order to file the 1099s. It also provides you with verification that you complied with the law, should the individual provide you with incorrect information. We highly recommend that you have a potential vendor or independent contractor complete a Form W-9 prior to engaging in business with him or her.

Many small business owners and landlords overlook this requirement during the year, and when the end of the year arrives and it is time to issue 1099-MISCs to service providers, they realize they have not collected the required documentation. Often, it is difficult to acquire the contractor’s, handyperson’s, gardener’s, etc., information after the fact, especially from individuals with no intention of reporting and paying taxes on the income.

This has become even more important in light of the tax reform’s 20% pass-through deduction (Sec. 199A deduction), since the regulations for this new tax code section caution landlords that to be treated as a trade or business, and therefore to be generally eligible for the 199A deduction, they should consider reporting payments to independent contractor service providers on IRS Form 1099-MISC, which wasn’t generally required for rental activities in the past and still isn’t required when the rental is classified as an investment rather than as a trade or business. This caution was included in IRS regulations issued after the close of 2018, which caught everyone by surprise and left most rental property owners to deal with obtaining W-9s after the fact from service providers and issuing the 1099-MISCs after the due date of January 31, 2019. For each 1099-MISC form filed after the January 31, 2019 due date but within 30 days there is a penalty of $50. After 30 days and by August 1, 2019 the penalty increases to $100 per 1099-MISC and those filed after August 1, 2019 the penalty jumps to $270 per 1099-MISC. These penalties do have maximum amounts. 

1099-MISC forms must be filed electronically or on special optically scannable forms. If you need assistance with filing 1099-MISCs or have questions related to this issue, please give this office a call. Also, make sure you have all of your independent contractors or service providers complete a Form W-9 for 2019.

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