Do you have to issue 1099s for work done on a rental
Investor · Mapleton, IL · Member since 2017 · 6 posts · 3 votes
Do you have to issue 1099s for work done on a rental
Most Popular Reply
Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votesThe code on this is actually a little bit grey.
Businesses who hire contractors are required to issue 1099s, but the grey area comes into play when you consider that you may own your property in your own name. There are those who would advocate and say that because you are an individual, you do not have the 1099 requirements because you are not "in business" because rental property is passive and there are those that will argue the nuance of a passive investment vs being "in business."
However, there are also those who would say that if you yourself are an independent contractor and file those taxes on a Schedule C, you are most assuredly "in business" and that you are required to issue 1099s, even though the reporting mechanism is essentially the same as the first example above.
So what to do?
For me, the key is in looking at the Schedule E that you use to report your rental activity. There is a question there that asks "Were you required to issue 1099s?" and a second question that says "If so, did you?"
To me, that indicates that, at least in the IRS' mind, you are required to issue the 1099s.
So what happens if you don't.
For each 1099 that you were supposed to issue and did not, the IRS can assess a penalty. If they determine that you neglected to issue them "willfully and knowingly", the penalty can increase.
You can frequently get out of the penalty after it is assessed by swearing that you are now fully aware of the law, that you swear you won't break it again and that you are implementing policies and procedures now so that you will always be able to issue your required 1099s in the future. You can do this once, and part of your policy/procedure needs to state that you will always ask for the contractor's 1099 status and paperwork BEFORE they start work and, most especially BEFORE you issue payment to them.
In essence, you agree to hold their payment hostage in return for the paperwork.
What happens if they give you a phony social security number (or EIN)?
You will get a notice from the IRS indicating that there is a name/ssn mismatch and ask you to correct it. If you reply back and say that you have lost touch with the person and can't correct it, then you will likely be ok. But now you cannot subsequently use that same person because if you try to use the same mismatch again, the IRS will recognize that and issue a fine to you.
It does suck that there are so many contractors out there dodging their taxes that the IRS had to come up with such draconian measures to gain greater compliance.
But also, ask yourself this.
If your contractor is skirting the tax filing requirements, what other corners are they cutting? Are you sure they're license is current? How about their insurance? Do they have any? Are you sure? What about their employees? Have they paid workers comp insurance? If not, what happens if one of your contractor's employees (or your contractor himself) is injured on your job site? (Hint - it's not good for you). And last but not least, what corners are they cutting in the quality of the job they are doing for you?
7 Replies
- Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes8y
Yes. You are supposed to issue a 1099 UNLESS the contractor is a corporation. The IRS is basically saying these individual contractors are not paying their fair share of taxes so they want us to help them catch them by issuing 1099s.
If the contractor is a corporation then you do not need to 1099 them. The reason being that a corporation would be better at managing their stuff? No idea but thats the rule.
Also, I was told by my cpa that if a contractor refuses to give their ssn information, then you will not be able to issue a 1099 and won't be at risk of being fined - provided that you don't continue to use them the following year.
The whole problem with the IRS' stance on this is that it requires contractors to give us their SSN. If I was a contractor, I wouldn't want to give out my ssn to every customer I did work for. Its silliness.
The IRS should have to figure out other ways of catching these guys instead of making me do their job for them. Require all payments to be by check. That would fix it too. Then the irs could audit their bank accounts and look at their deposits and see if they match their returns.
At the end of the day, its still super easy for these contractors to cheat. Because why a real estate investor might be aware of the rules and want to avoid the risk of getting fined knowing that they do several rehabs a year, a typical customer isn't going to know all that and they're not likely to ever get audited on it either.
So what are they really doing here? Out of a contractor's 80k in income, maybe 10k comes from me that they get 1099'd on and the rest from average customers that would never dream of issuing a 1099 (I dont even think half the people out there would have a clue how to generate a 1099 - including myself as my cpa does it). so the remaining 70k is still going undetected by the IRS.
The logic of this thing makes zero sense.
- Investor · Mapleton, IL · Member since 2017 · 6 posts · 3 votes8y
Appreciate the response. That's pretty much where I've arrived. Just hoping for a better answer. Do you ask them to fill out a W9 right when they start doing work for you? Curious how well that's received. I'd probably tell me to take a hike. I don't like giving out my SSN.
- 8yLinda WeygantPro MemberInvestor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
The code on this is actually a little bit grey.
Businesses who hire contractors are required to issue 1099s, but the grey area comes into play when you consider that you may own your property in your own name. There are those who would advocate and say that because you are an individual, you do not have the 1099 requirements because you are not "in business" because rental property is passive and there are those that will argue the nuance of a passive investment vs being "in business."
However, there are also those who would say that if you yourself are an independent contractor and file those taxes on a Schedule C, you are most assuredly "in business" and that you are required to issue 1099s, even though the reporting mechanism is essentially the same as the first example above.
So what to do?
For me, the key is in looking at the Schedule E that you use to report your rental activity. There is a question there that asks "Were you required to issue 1099s?" and a second question that says "If so, did you?"
To me, that indicates that, at least in the IRS' mind, you are required to issue the 1099s.
So what happens if you don't.
For each 1099 that you were supposed to issue and did not, the IRS can assess a penalty. If they determine that you neglected to issue them "willfully and knowingly", the penalty can increase.
You can frequently get out of the penalty after it is assessed by swearing that you are now fully aware of the law, that you swear you won't break it again and that you are implementing policies and procedures now so that you will always be able to issue your required 1099s in the future. You can do this once, and part of your policy/procedure needs to state that you will always ask for the contractor's 1099 status and paperwork BEFORE they start work and, most especially BEFORE you issue payment to them.
In essence, you agree to hold their payment hostage in return for the paperwork.
What happens if they give you a phony social security number (or EIN)?
You will get a notice from the IRS indicating that there is a name/ssn mismatch and ask you to correct it. If you reply back and say that you have lost touch with the person and can't correct it, then you will likely be ok. But now you cannot subsequently use that same person because if you try to use the same mismatch again, the IRS will recognize that and issue a fine to you.
It does suck that there are so many contractors out there dodging their taxes that the IRS had to come up with such draconian measures to gain greater compliance.
But also, ask yourself this.
If your contractor is skirting the tax filing requirements, what other corners are they cutting? Are you sure they're license is current? How about their insurance? Do they have any? Are you sure? What about their employees? Have they paid workers comp insurance? If not, what happens if one of your contractor's employees (or your contractor himself) is injured on your job site? (Hint - it's not good for you). And last but not least, what corners are they cutting in the quality of the job they are doing for you?
- 8yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
And this is why we love @Linda Weygant CPA superstar!!
The 1031 Investor5137 Reviews - 8yColleen F.Pro MemberInvestor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votesSo if you issue payment to a business this is a non-issue? Where is the line on what is considered a business, who you write the check to ? xyz construction vs joe Schmo...
- Member since 2020 · 8 posts · 1 vote4y
Excellent post! Question: I should ask my GC for a certificate of insurance AND a workers comp insurance policy AND proof of a valid license?
What if the license is valid but for a different state? Will that make the certificate of insurance and workers comp insurance invalid?
Thank you.
- Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes4yHere to note that this post/topic has changed since this thread originally happened.
With the 199a Deduction (20% off business income) If you are claiming your rental meets the level of a trade or business to receive that deduction, you must also 1099 people you pay over $600 to as well. Landlords were typically excempt, but now are in the same compliance.
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