W-9s & 1099s: How do I pay contractors "under the table"?
Real Estate Investor · Rochelle, IL · Member since 2015 · 10 posts · 4 votes
W-9s & 1099s: How do I pay contractors "under the table"?
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
8yI would never recommend you violate the law to save a few bucks. Anyone that cheats on little things is more likely to cheat on big things and I won't do business with them.
He who is faithful with little will be faithful with much.
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- Accountant · Orange, TX · Member since 2017 · 14 posts · 12 votes8y
Originally posted by @John Woodrich:
Originally posted by @Frank Palomino:
@Chinmay J. my understanding is that unless you're a "real estate professional" you may forego the reporting requirements. However, I consider it best practice to issue them. They're easy to file and you can do it yourself. If you're not comfortable doing it, your CPA can get it done at a minimal cost.
Wrong, there is not an exemption for real estate professional.
To clarify, you must give all individuals or LLCs you pay over $600 a 1099. This would be your contract labor and may also be your CPA. You do not have to issue them to corporations. If you are thinking of going the tax evasion route of having them setup corps you may also want to know that a corporation is required to file a corporate return every year and their are $195 per month late filing penalties that will apply to missed or late returns. Payments have to be made to the corporation so you will need a separate bank account, employer ID number, etc. These all add to your risk.
I know of one person who was caught without 1099s. He paid everyone in CASH (not check) so there was no way to verify his costs and all of this labor deductions were thrown out. Outside of this instance, in 10 years I have not heard of a client or business getting in trouble for missed 1099s. There is a per 1099 penalty but that would be minimal in comparison to the the missed deduction if they can't verify an expense.
You should issue 1099s, in the beginning it may be "ok" to play dumb but anyone who plans on being in business for the long haul should get their operations in order to comply with laws and regulation.
I'm not claiming there's an exemption for real estate professionals. I'm stating that landlords who are not considered real estate professionals and are receiving rental income in a passive capacity, are not required to file forms 1099. They are required to file forms 1099 when the level of their rental activities rise to that of a trade or business.
- 8yLinda WeygantPro MemberInvestor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
Back in the day, it was no big deal to "forget" to issue 1099s. If you forgot or did not know, the IRS would educate you and then remind you to do so if they saw that you were deducting a bunch of contract labor expenses without the associated 1099s on file. But they had few tools to demand compliance.
Since 2011, the IRS is becoming much more strident about the requirements and will continue to do so.
For forms that were due from 2011 through 2015, the penalty for late filing was $100 per form and $250 per form for Intentional Disregard.
For forms that were due in 2016, the penalty for late filing was $260 for late filing and $520 for Intentional Disregard
For forms that were due in 2017, the penalty for late filing was $260 for late filing and $530 for Intentional Disregard
For the upcoming 2017 tax year for forms that are due in 2018, the penalty will be $50 for each form filed 30 days late or less, $100 per form if they are filed before August 1 and $260 for late filings after August 1. Intentional Disregard remains at $530.
So for all y'all that are saying "I ain't doing it", consider that claiming the contract labor expense on your tax return is the first notification to the IRS that you should have some 1099s.
The second notification is the check box questions on Schedule E or C (or on the company tax return) that asks if you should have filed and, if so, did you? If you've got contract labor on your returns and those check boxes are not filed properly, you've just set yourself up for Intentional Disregard.
Lastly, you've just posted in a public forum that you have no intention of filing them. Some percentage of you will want to ensure that you've included $530 per form as a business cost.
Admittedly, the IRS isn't very fast at finding these things, but when they do find them, they are quite thorough.
I just successfully negotiated a fine of Intentional Disregard plus associated interest from $35,000 down to $9,000 for my new client, but it still sucks for them and they are really wishing now that they had issued the forms. Note - they were not my client when they neglected to issue them. My clients issue them.
Also, if you hire a contractor and then can't find them later to issue the 1099, you can document your attempts to contact them and possibly get forgiveness from the IRS. But if you use that same contractor again later, you'll get no forgiveness a second time. The IRS will then "recommend" that you hold off issuing payments until you receive the W-9. That's in air quotes because it's really not a recommendation. Basically, you'll just get audited every year until you have a history of compliance.
Whether you should have to or not isn't the issue. IRS takes a pretty dim view of conscientious objectors as well (right or wrong - I'm not going to argue that) and can also hit you with Willful Obstruction and Taking A Frivolous Position.
- Rental Property Investor · Brooklyn, NY · Member since 2013 · 272 posts · 165 votes8y
Why can't filers simply put the above-mentioned landlording & property-management expenses under Box 21 on Sched C "Repairs & Maintenance" or even 27a "Other expenses" or, Sched E Line 7 "Cleaning & Maintenance" or Line 14 "Repairs," or even Line 19 "Other?"
- 8yLinda WeygantPro MemberInvestor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
@Michael G. - you can do that, but it essentially comes down to the business code you allocate to your Schedule C (Box B) or just filing a Schedule E, if you're a landlord.
The IRS has metrics they use for these businesses. For example, they are very aware, based on decades of data mining, that a landlord can and does have service expenses that can be reported on lines 5, 7, 8, 10, 15 and 19 of Schedule E.
They also know that on Schedule C, service payments can be reported on lines 8, 10, 11, 17, 21 and 27 as well as buried in Cost of Good Sold. They also know that certainly business codes tend to have more of these types of expenses than others. If your return falls grossly outside of those metrics, the IRS is likely to begin an inquiry.
What it boils down to is this:
You can misrepresent anything you want on your own tax return. When push comes to shove, you are signing your tax return, under penalty of perjury, that what you are reporting is correct.
The question to ask yourself is, are you willing to risk penalties - up to and including jail time if it's serious enough - in order to help somebody else dodge their taxes and in order to save yourself some small percentage on your service costs?
- 8yDawn AnastasiPro MemberRental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
Someone mentioned in a prior post that a benefit to the contractor is that they don't have to pay taxes on cash payments. This is incorrect. Any cash income is still considered taxable by the IRS. Even illegal income is considered taxable by the IRS. If you don't pay taxes on illegal income, you can be convicted for tax evasion. Has anyone ever heard of Al Capone?
- 8yChris ClarkPro MemberWichita, KS · Member since 2017 · 65 posts · 55 votes
Originally posted by @Dawn Anastasi:
Someone mentioned in a prior post that a benefit to the contractor is that they don't have to pay taxes on cash payments. This is incorrect. Any cash income is still considered taxable by the IRS. Even illegal income is considered taxable by the IRS. If you don't pay taxes on illegal income, you can be convicted for tax evasion. Has anyone ever heard of Al Capone?
Correct about Capone. Also applies to certain herbs that are legal in Colorado currently. For federal tax purposes you have to pay tax on all income but then you are allowed no expenses from my understanding of how it is being treated for the federal return. I believe they have to be all cash businesses as well because of banking regulations with businesses that aren't legal at the federal level.
- 8yColleen F.Pro MemberInvestor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votesWhat is your required due diligence in knowing a company from an LLC? I have several vendors that I have worked with like the heating contractor where I wouldn't know offhand. Do you assume everyone is an. LLC or everyone is a corporation? I am paying company names most of the time so in my mind I would not reasonably expect they need a 1099. They also arent listed at the state level as an LLc but do I really need to check that? Even if they are listed at a state level as an LLc they could still file as a corporation ....
- Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes8y
Originally posted by @Colleen F.:
What is your required due diligence in knowing a company from an LLC? I have several vendors that I have worked with like the heating contractor where I wouldn't know offhand. Do you assume everyone is an. LLC or everyone is a corporation? I am paying company names most of the time so in my mind I would not reasonably expect they need a 1099. They also arent listed at the state level as an LLc but do I really need to check that? Even if they are listed at a state level as an LLc they could still file as a corporation ....You can pretty much assume that if you are paying a person in the RE world and their company name doesn't end with "Inc" that they are not incorporated and should be issued a 1099. If you ask someone for a W-9 and they are a company they will likely say that they are a corporation. Corporations should have Inc at the end of their name but they don't always operate like they should and they may have a DBA (doing business as) name registered separately from their corporation.
I know some wise guy is going to say "I don't have to issue one to Home Depot and they don't have Inc behind their name" and that is because they also have a DBA to use the name Home Depot.
This is pretty straight forward, generally anyone who provides services to you and you pay them over $600 should get a 1099 unless they are a corporation.
- As a business owner, if you wish to pay someone in cash, do so. That means two things, (1) You are paying them with money you will pay taxes on since it is your own cash. (2) You don't get to write it off as a business expense. You can't agree to pay in cash, then hit a contractor/worker up with a 1099 just so you can get a tax write-off. It totally ruins the point of paying in cash. If you want write offs, agree to a contract price and pay with a check to a licensed contractor. Of course, you will have to pay the contractor his wage plus the necessary income taxes so he can make the same wage as if paying cash. Income taxes cause a significant increase in price. So it's up to you, pay more for a contract and write-offs or pay less in cash with no write-offs. You don't get the benefits of both. Hope this clears up any confusion on how to handle matters like this, best of luck.
- 8yLinda WeygantPro MemberInvestor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
@Colleen F. - you ask the contractor to fill out a form W-9. Based on the information they provide in that form, you will know whether or not to issue the 1099.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes8y
@Carlo Michelotti you do know that you are asking people on BP how to commit tax fraud. I am sure that wasn't your intention. The reason the IRS requires the 1099 is to prevent under the table transactions that result in tax evasion. You may get a discount on services, but it could be costly if it is done by cheating the federal government of taxes. If you are audited and any single supplier has been paid over $600, they can rightfully ask why you didn't 1099. They can force you to pay taxes and fines.
You only need to 1099 individuals, such as people doing work on the side if the total amount is $600 or more per year. Corporations don't require 1099, because they already have a federal tax ID. I ask anyone doing work for me to provide a copy of their federal tax ID number. If they don't have one, I get their social security number and have my CPA send them a 1099. It is best to ask this BEFORE work is performed. If someone tells me they don't plan to pay taxes, then they don't do work for me.
As far as Home Depot or anyone you pay with credit card, the credit card company reports those transactions. Credit card transactions are not subject to 1099 reporting because the credit card companies report them.
Just be aware with the IRS that trying to claim ignorance of the law does not release you from liability. It is best to follow this law rather than paying under the table.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes8y
One thing to mention in all of this: intention is a big part of any IRS dealings. If you pay by check, record the nature of the work on the check, and get a receipt, it is going to take you a lot further than paying cash with no paperwork to back it up. You may end up breaking the law either way, but the consequences will likely be far different if you appear to be above board than below it.
Skyline Properties - 8yColleen F.Pro MemberInvestor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votesSo basically you all are saying everyone unless they prove otherwise gets a w9! That's overkill. Too much to expect there would reasonable approach suggested. Hmm but this is the IRS....
- Parlin, NJ · Member since 2017 · 28 posts · 2 votes8y@frank chin Do you have your property management business under an S Corp?
- Jersey City, NJ · Member since 2017 · 124 posts · 13 votes8yInteresting discussions
I called the IRS with this question last year. I'm going off my increasingly failing memory but as I recall it was determined that landlords did not have to send 1099 to contractors. That was for my particular situation, cant recall if the number of rentals or something like that had something to do with the decision. That was for 2016 tax year.
Do services include the materials that the contractor provides when performing those services? Reason I ask is that I had 2 homes levelled this year. 2200 bucks and 2000 bucks. The guy advertises as a business, and I paid by check both times, no complaints from him. I'm sure a substantial portion of the cost was materials. Do I need to 1099 him?
@Linda Weygant is that true what was stated above that contract services paid by credit card are exempt from 1099
- 8yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Interesting discussion indeed. @Mike H. - the tax system is not meant to make sense. It is meant to provide employment for millions of govt workers and tax accountants.
@Carlo Michelotti - the best answers are offered by @Brandon Hall, @Linda Weygant and @Frank Palomino.
I will try to summarize what my colleagues said and resolve the remaining confusion if any. I wrote blog posts about 1099s, but BP won't let me link to them from here. You can google them. So, here we go.
1. Deducting an expense and issuing a 1099 are two related but separate issues. You can always deduct labor, with or without a 1099. If you're audited, you will need to prove that the money was paid. Issuing a 1099 is an additional requirement. If you fail to do so, your expense may still be allowed, but you will be hit with heavy penalties. Yes, the IRS does pursue people for not filing 1099s.
2. You're subject to 1099 rules if you run a "trade or business." This is an infamous grey area. Flippers, wholesalers and Realtors are 100% "trade or business", there's no debate about it. Landlords who report their rentals on Schedule E (including disregarded LLCs) normally are NOT considered "trade or business." They can usually check the "not required" box on Schedule E and forget about 1099s. One exception: if you're claiming the notorious "RE Pro" status to get around limitations on deducting losses - then you absolutely become a "trade or business" and must obey the 1099 rules. If you're a landlord filing as a pass-through entity (partnership or S-corp) - then it's debatable. I recommend you stay on the safe side and assume that all pass-through entities are "trades or businesses" and are subject to 1099 rules.
3. Warning for landlords: before you quit reading and decide that 1099s are not your concern, understand that it can still backfire. Once you claim that you not a "trade or business" for 1099 purposes, the IRS can use your position against you. They can disallow your deductions for various business operating expenses, such as marketing or education. Bottom line: even if you think you don't have to file 1099s, it is a wise strategy to do it anyway.
4. Now, who do you send 1099s to? Generally, to anybody who provided you at least $600 in services during last year. The key word is "services." This is why you do not send 1099s to Home Depot: because you buy materials there, not labor. If your contractor separates labor from materials - you issue a 1099 for labor. If you contractor does NOT separate labor and materials, you issue a 1099 for the total amount. It is his problem, not yours. Besides contractors, you issue 1099s to everyone else who provided labor and services: consultants, wholesalers, stagers, accountants etc.
5. First exception: corporations. If your contractor or vendor is a corporation - no 1099s needed. However, LLCs are not corporations (most of the time) - so you do need 1099s for most LLCs. How do you know if they are a corporation? Give them Form W-9 to complete. They should check the "corporation" box and sign. If they checked the box - you're off the hook. But keep the form!
6. Second exception: electronic payments. If you pay anybody with a credit card or some form of electronic payment like PayPal - no 1099s needed for these vendors. In fact, you should NOT issue 1099s to them. If you paid them $5,000 by credit card and another $1,000 by check - then you still need to issue a 1099 for the $1,000.
7. How do you get their SSN for 1099s? They must complete Form W-9 before they start work. After you paid them - forghedaboudit. Game over, you lost. If they have brains, then will not give you SSNs, and you really should not accept them either - due to ID theft and all. They need an EIN which they can obtain for free on the IRS website. Help them if needed. No need for an LLC to get an EIN. An EIN is just a substitute for the SSN, for business purposes.
8. But they won't complete W-9. Yes, I know. This was discussed by other people on this thread. It's best to use clean contractors, for many reasons. Saving a few bucks by hiring illegal contractors or cheaters can turn out to be very expensive. You might have to deal with their shoddy work, claims for workplace injuries, and IRS penalties. In bigger cases, even with immigration enforcement. Not to mention that if they cheat on taxes, they may cheat on you. But it's your business and your decision.
9. But they will give me fake numbers. They might try. You can verify it for free though - so it's not an excuse.
10. But I have never done it. Well, start now. If the IRS catches you, at least you will show that you started following the rules. This can save you from penalties.
11. Too much work. Or too much IRS penalties - your choice. Filing 1099s can be done online for a nominal fee, sometimes for free. Google "e-filing 1099-MISC" for 3rd party providers.
- Well, you can either go with a legit fully licensed and insured contractor, and pay the market price, or pay some guys cash and pay 1/2 or 2/3 of the price. Pick one, but you won't get both the cheap price and the tax saving.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes8y
Originally posted by @Mike H.:
I agree. Its just a headache for the average citizen and no real consistency in why they make us 1099 an individual versus an LLC or Corporation. Are they telling us that corporations don't cheat on their taxes? Come on! :-)
When I leave a tip for a waiter/waitress, I'm not 1099'ng them even if I leave over 500 tips in any one year. Why is that?
Understand I'm being a bit of a smart alec on this. But at some point, I do believe that its simply not my job to help the irs collect money from people - not if it requires me to do work for them.
I'm reporting the payments. If they want my cpa to add them up and report them on some form, I'm fine with that. But I shouldn't have to get all their personal info to do it. That just exposes me to claims for identify theft and the like should that person ever get hit with identity theft.
I don't want anyone's social EVER nor should I be required to get it!
You are not an individual. You have a real estate business and if you choose to hire individuals versus corporations, you have a legal responsibility to report the money you pay them under a 1099. You do NOT have to collect any money or pay any money. The 1099 is just declaring exactly what you paid the individual. Whether the individual pays is between them and the IRS.
The social security number would not be required if the individual had a tax payer ID number. The reason you need their social security number is because it is their tax payer ID. If you reported income from John Smith, how would the IRS have any idea which John Smith that is?
As far as you collecting a social security number from a contractor, you could have your CPA send the form to stay out of it. My CPA handles all my W9 and 1099 activities. Any investor in the rental business is regularly collecting all sorts of personal information. Not only SS number, but date of birth, drivers license and other personal information. Your business should have policies on how to handle personal information, such as locking it in a secure location or password protected on electronic media.
If you choose to be in business, then you need to follow the tax laws. Those of us sending W9 and 1099 find it to be fairly easy and not really a burden. I only have to do it for a couple people. The problem is trying to get the W9 AFTER work is completed. If you set the expectation up front, then they either complete the W9 or don't work for you.
Another thing to consider, if you are paying someone more than $600, why wouldn't you want their Name, Address and Social Security number? No business wants unknown people doing work for them.
- 8yLinda WeygantPro MemberInvestor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
Originally posted by @Eddie T.:
@Linda Weygant is that true what was stated above that contract services paid by credit card are exempt from 1099
Yes, that's correct. Their credit card servicing company will issue them a 1099-K for all transactions that were processed. If you also send a 1099-MISC, you are double reporting it and the contractor will have to explain the situation to the IRS
- Investor · Boston, MA · Member since 2015 · 398 posts · 147 votes8y
Isn't the whole idea of 1099's to make sure the IRS doesn't say YOU are liable for the tax for these people? Otherwise they will say that on top of what you paid them, you ALSO have to pay THEIR TAXES?
- Rental Property Investor · Brooklyn, NY · Member since 2013 · 272 posts · 165 votes8y
That is not the premise of sending a 1099. It is meant to more formally declare the larger expenses for which you are expecting a deduction, and to alert the IRS that, as a result of this expense to you, someone else has earned income - upon which they expect taxes to be paid. Their systems match-up the expenses you claim with the income your payees report.
Pretty simple.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes8y
Look at IRS form Schedule E which is used to claim rental income and expenses.
Part 1 question A: Did you make payments in 2017 that would require you to file a schedule E?
https://www.irs.gov/pub/irs-pdf/f1040se.pdf
https://www.irs.gov/pub/irs-pdf/i1040se.pdf
Talk to your CPA and make sure they are in agreement with whatever you are or are not doing.
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