Partnering on Wholesale Deals? Here's Why a W-9 is Super Important

WHOLESALERS, IT'S TAX TIME!!! HERE'S A TIP

I know, it's lengthy, but five minutes could save you thousands . . .

Working with other wholesalers to buy and/or sell investment properties is a great strategy because it allows each of us to expand our network, which in turn allows us to do more deals. However, let me drop some knowledge on ya, as we near tax time.

Here's My Example: Your company has partnered with another company, Company B, in a wholesale deal. Your company acquired the home and Company B found a buyer. Simple enough, right? Okay, good. The total fee on the deal was 15k. Man, that works all day long. But, let's say you and Company B structured the deal to where you would split the "fee", and your company would pay the Company B "OUTSIDE OF CLOSING" (this is the key factor in this hypo). On the Hud Statement, your company is getting paid 15k on the transaction. The title company strokes your company a check for 15k and you head to the bank and make a deposit. You then meet Company B and cut he/she a check for 7.5k. Awesome! Great pay day for both of you. However, you are missing something very important here . . . know what it is?

IT'S A W-9!!!

Come tax time, if you did not get a W-9 from Company B, you may not be able to offset the 15k income you were paid, and then you will be responsible for paying taxes on the whole amount. So, when it comes time to cut Company B a check, YOU NEVER DO SO WITHOUT GETTING THEM TO SIGN A W-9 FIRST.

INCORPORATE THIS INTO IN YOUR GAME NOW: You tell Company B, "Fill out and sign this W-9 and then I'll cut you a check."

Make sure the form is filled out in detail. It's one page, so it's easy. This form offsets your company income to Company B, limiting the liability on your company. Now, you will only be taxed on 7.5k instead of 15k. Make sense?

CAVEAT: If you forget to have Company B sign a W-9, then you can always get them to sign one after the fact. Just get them to do so before it's tax time, for that year. BUT, just remember, not everyone is so honest and likes income attaching to them. That's why getting them to sign a W-9 before cutting them a check is so important. Hunting down another to get them to sign one can be a wild goose-chase.

BASIC RULE TO A W-9:

- A W-9 is never actually sent to the IRS, but is maintained by the individual who files the information return for verification purposes. The information on the Form W-9 and the payment made are reported on a Form 1099.

FORM 1099 MISC. . . . THE BELOW IS VERY IMPORTANT.

Rules:

1. When a business deals with contractor(s) (Company B)) and pays a contractor at least $600 during a tax year, the business is required to file Form 1099-MISC. In other words, if you do a deal and cut another company a check for more than $600 this applies. If not, then not worries.

2. It’s a good idea to check with each contractor to see if any information has changed from the W-9 to starting the 1099 process, i.e. business address change, etc. If the contractor has not provided a W-9 or omitted specific information, the IRS says that you can withhold 28% of the contractor’s pay and send this directly to the IRS; this is known as “backup withholding.” Chances are you already stroked a check, but just know you have this play.

3. Once you have accurate information to work with, it’s time to get your 1099s. You cannot use a downloaded Form 1099-MISC or a sample from the IRS; you are required to use specific forms that are readable by the IRS scanner that process all 1099s. You can order these forms from the IRS by calling the IRS or visiting their website. 

4. Delivery by hand or mail. Must send all 1099s by Feb.1st, as the contractor needs to send to the IRS by Feb 29th (paper filing) or March 31st (electronic filing). So, get them one sooner than later.

5. Keep a copy of the 1099 for your records.

Yes, this was long, but hopefully you will find this helpful and issue any W-9s you have missed so you can process your 1099s.

Hope you found this helpful.

Disclaimer: I am not a Tax Attorney or CPA, just an investor who has issued lots of 1099s.