Investors, NOW is the Time to Issue 1099s: Here’s Who Needs to Receive Them

Investors, NOW is the Time to Issue 1099s: Here’s Who Needs to Receive Them

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Amanda Han

Amanda Han has been a CPA specializing in tax strategies for real estate, self-directed investing, and individual tax planning for over 18 years. She’s been investing in real estate herself for over 10 years with a focus on long-term hold residential and multifamily assets across multiple states.

Experience
As both a tax strategist and real estate investor, Amanda combines her passion of real estate investing with her expertise in tax. Her goal is to help investors with strategies designed to supercharge their wealth-building using entity structuring, self-directed investing, and income offset opportunities to keep more of what they make.

Her highly rated book Tax Strategies for the Savvy Real Estate Investor is amongst Amazon’s bestseller list. Amanda is also a frequent contributor, speaker, and educator to some of the nation’s top investment and self-directed IRA companies.

Amanda and her husband Matt MacFarland have a passion for animals and founded Animals for Armed Forces, a non-profit organization that has helped to place over 1,800 shelter pets with forever homes.

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Her cutting-edge tax strategies have been featured in prominent publications, including Money Magazine, Realtor.com, and AllBusiness.com. Amanda was a speaker at “Talks at Google” that features influential thinkers and creators. Amanda has also appeared in CNBC’s Smart Money Talk Radio, as well as BiggerPockets podcasts.

She is a 40 under 40 honoree by CPA Practice Advisor, showcased amongst the best and brightest talent in the accounting profession. Her firm Keystone CPA, Inc. was awarded a two-time winner of the Top CPA of Orange County Award by OC Metro Magazine.

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She is certified by the CA State Board of Accountancy and is a member of the prestigious American Institute of Certified Public Accountants (AICPA) with clients across the nation.

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Don’t forget — the time for filing 1099s is almost here. If you are required to file 1099s, then forms must be sent to the recipient by January 31st. The forms must also be sent to the IRS by February 28th if you file the 1099s by mail or by March 31st if you file electronically. January 31st is right around the corner, so make sure you’re getting the forms done now.

A question we get all the time at our office is, “Who must 1099s be issued to?” Here are a few pointers for real estate investors:

The rule is that if you paid someone more than $600 during the 2015 year, then you may need to issue a 1099 to them. One common misunderstanding is that the $600 rule is by vendor, not by check amount. For example, let’s say you have a plumber that you call out to one of your rentals a few times a year. If each time he comes out he charges $300 and he came out a total of three times that year, then the total you paid your plumber is $900. In this scenario, you may need to issue him a 1099 since the total you paid him during the year is more than $600.

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Related: 3 Tell-Tale Signs You’re NOT Running a Tax-Efficient Business

What You Should Do BEFORE You Pay Your Contractors

You should give a W-9 to each contractor that you hire to fill out before you pay them. It is a good idea to get the W-9 up front before you pay a person because odds are if you ask them for a W-9 after you already paid them, they may be reluctant to give you their information to avoid reporting that income. You do not need to verify that the info they give you is correct. If they give you false information and the IRS finds out, the IRS will simply inform you and tell you to withhold taxes next time you pay this person. You will not have penalties in this scenario.

To make sure that you don’t get stuck paying a contractor’s tax liability, make sure that you get a W-9 from each and every contractor, even if you’re not sure if you need one. When it comes time to fill out 1099s, your CPA can help you to determine which contractors should be issued one.

The IRS requires 1099s to be issued so that they can track income earned by independent contractors. By issuing a 1099, you are giving the tax liability on that income to the contractor to report. If you do not issue 1099s and you are audited, the IRS will penalize you anywhere from $200 per payee or up to 28% of the amount that you pay them to cover the tax on the income that this person may not be reporting since you did not issue them a 1099.

How to Prepare for a Possible Audit

You never know what an auditor will be looking for, as the level of leniency during an audit can vary drastically from one auditor to the next, so it is important to make sure that 1099s are issued correctly, as this is likely an area that they will want to look into.

I have seen some auditors make the taxpayer pay tax and penalties for each unissued 1099s, but I have seen others give the taxpayer time to go back and issue the 1099s to avoid paying tax on the income. Remember, it is the payer’s responsibility to issue 1099s to their contractors, so get the documentation up front to protect yourself.

You generally need to issue 1099s to contractors, property managers, wholesalers, consultants, landscapers, and handymen. If they operate their business as an S-Corporation or a C-Corporation, then you generally do not need to issue the form to them. The 1099 requirement usually only applies to LLCs, partnerships, and sole proprietors. The exception to this rule is for attorneys. If you pay an attorney more than $600, then you must issue them a 1099 regardless of the type of entity that they have.

tax-implication-notes

Partnered With Someone? They May Need a W-9, Too

Other times you may want to issue a 1099 is if you partnered with someone on a deal and they got a cut of your profit. Request a W-9 from them to see if a 1099 needs to be issued. For those of you renting space from a landlord, you may also need to issue a 1099 to your landlord if rents exceed $600.

Related: How to Prove Tax Deductions as an Investor: A Guide to Tracking Receipts

Make sure that you’re covered this tax season. If you have not requested W-9s yet, get them now. The longer that you wait, the harder it may be to get them back from contractors. To fill out the 1099, generally all you need is the W-9 and the grand total paid to each payee for the year.

Most office supply stores, such as Office Depot or Office Max, will have 1099 Forms available. Remember, you must purchase official 1099 Forms and cannot simply go online and print off free forms from the internet. If you don’t feel comfortable filling out the forms on your own, ask your CPA to prepare them. You don’t want to get stuck paying someone else’s tax, so make sure your 1099s are issued on time and filled out correctly.

Investors: What has been your experience with 1099s? Anything you’d add to the discussion?

Leave your comments below!