to 1099 or not to 1099, that is the Question.

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to 1099 or not to 1099, that is the Question.

Mark Vandzura
Rental Property Investor · Franklinville, NJ · Member since 2016 · 73 posts · 20 votes

I own several rental properties in New Jersey owned in two LLC's and now it's tax season. I have several venders (plumbers, electicians, HVAC, etc.) that I use for maintenance and repairs. This year my wife learned that we are supposed to send out a 1099 to any vender who we have paid over six hundred dollars in labor. We haven't done this in the past. But apparently we could get fined and receive penalties from the IRS if we get audited. Is this correct? Has anyone had any experience with 1099's? How crucial is it that I send out 1099's? Any and all advice will be greatly appreciated.

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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
7y

If a payee refuses or neglects to provide a Tax ID Number when requested, the business should begin backup withholding (at the rate of 28 percent) on any reportable payments made to the payee. These funds are sent to the IRS.

The business should make three attempts to collect the payee's Tax ID Number. 

If a contractor, vendor, or other payee fails to provide his Tax ID Number, then you should fill out a 1099 with a notice that the payee failed to provide his Tax ID Number.

Failure to file Form 1099 based on a person’s refusal or failure to provide his taxpayer identification number does not excuse the business from timely filing all required information returns.

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  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    7y

    If a payee refuses or neglects to provide a Tax ID Number when requested, the business should begin backup withholding (at the rate of 28 percent) on any reportable payments made to the payee. These funds are sent to the IRS.

    The business should make three attempts to collect the payee's Tax ID Number. 

    If a contractor, vendor, or other payee fails to provide his Tax ID Number, then you should fill out a 1099 with a notice that the payee failed to provide his Tax ID Number.

    Failure to file Form 1099 based on a person’s refusal or failure to provide his taxpayer identification number does not excuse the business from timely filing all required information returns.

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    5Reply
  • Mark Vandzura
    OP
    Rental Property Investor · Franklinville, NJ · Member since 2016 · 73 posts · 20 votes
    7y

    Thanks for your input @Nathan G.

    Very helpful

    1Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    7y

    Since I use a CPA they audit me before filing and the tax filer wants to make sure I gave them a 1099. If they do not include mine I don't know but I have them on file if I get audited.  As for those only taking cash I do not use them.  You should make an effort to send out 1099s starting now. Yes, if IRS does an audit on you the deduction is probably not legit. 

    1Reply
  • Mark Vandzura
    OP
    Rental Property Investor · Franklinville, NJ · Member since 2016 · 73 posts · 20 votes
    7y

    Thanks @Sam Shueh, I will be sending them out this year. I talked to my accountant and they told me the same thing but I don’t know why they never mentioned it in prior years.

    0Reply
  • Tim Johnson
    Lender · Grand Rapids, MI · Member since 2018 · 703 posts · 446 votes
    7y

    I'm a GC and we run into this all the time.  We don't pay until we have a 1099 and proof of insurance.  No work can start until its on file.

    Alot of guys push, but you don't want them because they are hacks.

    They provide the documents they are usually trustworthy.

    Just an FYI also call the agents because alot of these jokers like to send it false documents, protect yourself.

    3Reply
  • Mark Vandzura
    OP
    Rental Property Investor · Franklinville, NJ · Member since 2016 · 73 posts · 20 votes
    7y

    @Tim Johnson

    I was told I need to get a W9 from them if they did more than $600 of work and then I need to send them a 1099. Is that what your saying?

    0Reply
  • Tim Johnson
    Lender · Grand Rapids, MI · Member since 2018 · 703 posts · 446 votes
    7y

    Yes $600 worth of work is the start.  I require it on everyone no matter what.  

    0Reply
  • Frank Chin
    Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes
    7y

    @Mark Vandzura

    I've done accounting for small firms and W9's are always given to people who did work for the first time. 

    Keep in mine 1099's are for non-incorporated entities, and I don't think that has changed in recent years. And it should be for labor, not the sale of goods.

    I done computer consulting work for a small company. I had an S Corp setup, but none the less, the client issued me a 1099. Two years after, I got a letter from the IRS, they did an audit, saying the my tax report for sales from the S Corp didn't match the 1099. At the time, I just started my business and only had that one client that year which made it easier.

    Turns out the problem was the client reported on the 1099 all the checks he issued to me, totaling about $30,000. Yes, I did $10,000 worth of consulting including programming, but I also sold him computers and hardware. Hardware sales came to $20,000, but it cost me $15,000 to purchase. In short, I had $30,000 in sales, with COGS of $15,000, gross profit of $15,000. Then I had administrative expenses bringing the net to around $7,000.00

    The IRS asked me why they have about $30,000 in 1099's and $7,000 income. I sent them my P&L which mirrored what I reported on my S Corp returns. In fact, total invoicing to the client matched the 1099. I pointed out invoiced sales to the one and only customer I had was $30,000. I received a reply from the IRS saying "they understand and accept my explanation" and suggested I contact the issuer of the 1099 to prevent future issues.

    I did some research on 1099's and met with the president of my client company, who is also a CPA. I explained to him that being an S Corp, I should not have been issued a 1099 to begin with, but if he does and he can, to do it correctly. I told him he should have reported my consulting fees on the 1099, not hardware sales. Recalled he called in the bookkeeper to say "remember I told you just to report the consulting fees". I myself purchase supplies from a small local hardware store and would have to 1099 the store if I had to 1099 all purchases.

    So I told my client that if he couldn't do the 1099 correctly, he can legally not issue me a 1099.

    The long and the short of it was I used plumbers and electricians that are incorporated, with the corporate name on the truck, licensed and insured. So no 1099's for them, so far, no 1099's for anyone for my rentals.

    But I am still perplexed by the IRS audit to this very day, since I pointed out the $30,000 sales figure on the tax return actually matched the 1099, which is what I wrote to them. Maybe some CPA's here can shed some light on it.

    2Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    7y

    @Mark Vandzura

    Government is cracking down hard these days. I use the same CPA for 8 years and never heard any discrepancy from IRS. His rates are similar to HR Block and these forms are more complicated.  IRS is more strict on home improvement vs repair on rental deduction these days.  

    0Reply
  • Jason Powell
    Beaverton, OR · Member since 2014 · 118 posts · 119 votes
    7y

    Have any small time landlords on here ever gotten their deductions taken away for failing to send a 1099, but had invoices and proof of checks cashed?

    Ignorant question here, but I thought small time landlords were exempt from needing to send those, and it was for flippers, and landlords/prop managers that used RE as their business. 

    0Reply
  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    7y
    Originally posted by @Jason Powell:

    Have any small time landlords on here ever gotten their deductions taken away for failing to send a 1099, but had invoices and proof of checks cashed?

    Ignorant question here, but I thought small time landlords were exempt from needing to send those, and it was for flippers, and landlords/prop managers that used RE as their business. 

     No - that's not how it works.

    The 1099 is not used to substantiate the deduction.  As you mention, invoices and checks cashed are the substantiation.

    1099s have a complete and separate purpose - to help the IRS find and tax people who otherwise might not report the income.  That's it.  As part of that goal, they penalize you, the payer, for not helping them with this goal.

    So, to be clear - your ability to take a deduction for the labor and your requirement to issue a 1099 are completely and totally disconnected.

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  • Frank Chin
    Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Jason Powell:

    Have any small time landlords on here ever gotten their deductions taken away for failing to send a 1099, but had invoices and proof of checks cashed?

    Ignorant question here, but I thought small time landlords were exempt from needing to send those, and it was for flippers, and landlords/prop managers that used RE as their business. 

     I agree on the exemption part, and I recall reading info some years back on small landlords were exempt from 1099's. I found info from the year 2010 about it. See:

    According to the above, 1099's are required from real estate professionals, and Congress tried changing that in 2010 for all rental activities but it didn't go through. But as I mentioned above, most of the contractors I used are "corporate" anyway, so for that reason alone, no need for 1099's in my case. And I don't consider myself a real estate professional either.

    1Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    7y
    Originally posted by @Mark Vandzura:

    I own several rental properties in New Jersey owned in two LLC's and now it's tax season. I have several venders (plumbers, electicians, HVAC, etc.) that I use for maintenance and repairs. This year my wife learned that we are supposed to send out a 1099 to any vender who we have paid over six hundred dollars in labor. We haven't done this in the past. But apparently we could get fined and receive penalties from the IRS if we get audited. Is this correct? Has anyone had any experience with 1099's? How crucial is it that I send out 1099's? Any and all advice will be greatly appreciated.

     It's very important, a must do actually. In the future make them fill out a W-9 prior to paying them so you don't have to play catch up again.

    0Reply
  • Bobby Stener
    Rental Property Investor · SF Bay Area · Member since 2018 · 49 posts · 54 votes
    7y

    According to my accountant frank is correct, I just did a decent size project and my accountant said no need to collect 1099 as I’m not in the real estate business.

    0Reply
  • Lynnette E.
    Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
    7y

    Do I need to issue a 1099 to a LLC ? One trades person I use has an LLC, and I a not sure if they get 1099s or not.

    0Reply
  • Frank Chin
    Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Lynnette E.:

    Do I need to issue a 1099 to a LLC ? One trades person I use has an LLC, and I a not sure if they get 1099s or not.

    This issue came up once for me. The organization I did work for was publicly funded and required an annual audit, had one tradesman who started with us as an individual, then changed to an LLC. We issued 1099's to individuals, but I decided to not 1099 this one as she suppled an EIN# on the W9, and concluded she's corporate. The auditor, a CPA, disagreed saying to play it safe, continue 1099 to her. The issue revolved around whether she chose to file taxes as a corporate entity, or use the LLC as a pass through, and the W9 doesn't tell me that. We use QuickBooks for bookkeeping, and it's simply a matter of clicking off a box in the vendor setup. I told the auditor I don't plan on asking vendors how they do their taxes.

    When I issue payments to 1099 contractors, I issue separate checks if we have to reimburse them for purchases, and these don't go on the 1099. And books have to be set up so. For my real estate, no plans now to do 1099's, so I just book checks to the plumber as plumbing repairs. My plumber been around for 30 years, and it's the "xxxxxx Plumbing and Heating, Inc." so I know it's corporate. LLC's are relatively new, and I don't have tradesmen yet that are LLC. The non-profit I did work for only has one LLC to 1099, and the remainder, more than 20, are all individuals. These are the ones that exceed the $600 annual limit. We have many others that run under.

    But if you're just a real estate investor, I'll just use to small landlord exception as discussed above. Save you lots of headaches. If you do 1099, be ready to confront the issues and use proper bookkeeping.

    1Reply
  • Mark Vandzura
    OP
    Rental Property Investor · Franklinville, NJ · Member since 2016 · 73 posts · 20 votes
    7y

    Thanks to everyone for all your input! 

    0Reply
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