EXPLAINED: sending 1099s to contractors and vendors

[Michael Plaks]

This is a revision of my old post on this timely topic. Timely because January 31st is the deadline.

Sending 1099-NEC (formerly 1099-MISC) to contractors and vendors

2024 update: While not directly related to sending 1099-NEC forms to your contractors, you may have seen the panic on social media about every $600 electronic payment reported to the IRS under a new law. This law has been postponed and may end up being reversed. Nothing has changed for now.

2024 update: We recommend eFiling for everyone, however starting this year eFiling is mandatory if you file more than 10 forms.

2023 update: The IRS (finally!) created a free eFiling option for 1099s directly with the IRS. Early testing of this new system indicates that it’s a pain to get access to. For now, we recommend using the 3rd parties listed in the below post.

The beginning of the year is a perfect opportunity to get even with all those contractors who worked for you during 2023: report them to the almighty IRS and make them pay taxes on the money they received from you. In fact, it applies not only to contractors but to everyone who did some kind of work for you last year: property managers, wholesalers, mentors, attorneys, and even – yes! – accountants.

THE DEADLINE IS JANUARY 31st!

Warm-up: FAQs that are often answered wrong

Q1: I pay less than $600 for my AirBnB cleaning. Do I need to send 1099s?
A1: Yes. 1099s are for the annual total, not per job.

Q2: Do I need to send 1099s for materials?
A2: No, for labor only.

Q3: I paid my GC via Zelle and my lawyer by credit card. Do I need 1099s?
A3: Zelle payments require 1099s. CC payments are exempt.

Q4: I pay with Venmo, CashApp and PayPal. Do I need 1099s?
A4: If you pay as “friends and family” – then yes, need 1099s.

Q5: I only need to send 1099s to people, not to LLCs, right?
A5: Wrong! You do need to send 1099s to LLCs.

Confused by any of these answers? Then definitely keep reading for explanations.

Should you even bother?

Your first question might be – why should I? Well, three top reasons come to mind:

1. It will allow you to deduct their earnings on your own tax return.
2. It is required by law for any person to whom you paid at least $600 in 2023, total. If you do not report these earnings to the IRS, you can incur IRS penalties as high as $580 – for each worker ($290 for not sending it to the IRS + $290 for not sending it to the contractor)!
3. If the IRS gets busy auditing them, maybe they will leave you alone. Or maybe not.

When, where, and how?

The next question is – how do I do it? The short answer is: file form 1099-NEC. There is a cumbersome way to do it on paper forms, but you should not.

2024 update: If you file more than 10 1099s, you MUST eFile them now.

Here are some of the online 1099 filing companies, and you can easily find others:

• tax1099.com
• WageFiling.com
• 1099online.com

These companies charge under $5 per form. Want it for free? Some providers allow filing of a handful of forms for free. But – always do your own due diligence, even with the companies mentioned above. Too many scammers out there.

For the recipients, you can mail them a printed copy, email it or even email a substitute statement. The online eFile providers can do it for you, sometimes for free.

Warning: Email is NOT secure, and you will expose your contractors to unnecessary risk of identity theft. If you do send them 1099s via email – use passwords and encryption or remove the SSN.

Who should receive 1099-NEC?

The other critical question is – whom do I need to send these 1099s to? The general rule is: to anybody who was paid by you for services (work) or who received a profit distribution from you – if he received from you a total of at least $600 total during 2023. This list includes:

• Contractors of all kind
• Wholesalers and birddogs (but not Realtors!)
• Consultants, inspectors, and mentors
• Property managers
• Assistants
• Bookkeepers, accountants, and attorneys
• Landlords if you rent your office space
• Your business partners if you paid them (except if they were strictly lenders)

Disclaimer about wholesalers: it is a controversial issue, with some of my colleagues claiming that wholesalers do not need 1099s. I recommend that you stay on the safe side and do send 1099s to your wholesalers.

You do not need to send 1099-NEC in these cases:

• You paid the contractor electronically (more on this below)
• You paid the person a total of less than $600 during 2023
• Payments for purchasing all kinds of goods, materials, and property, including real estate itself
• The person who worked for you is a corporation, and you made payments to his corporation. Warning: this exception applies to corporations only. You still need to send 1099s to all DBAs, LLCs, and partnerships. LLCs are not corporations, unless they specifically elected to be one.
• Commissions and fees paid at closing to licensed realtors and mortgage brokers
• Repayments of loans

1099s for electronic payments – yes or no?

Short version: You are off the hook if you paid the contractor electronically. Electronic payment processors issue 1099s themselves. Even if they do not, it’s not your legal responsibility.

Long version: It actually depends on your method of payment, and it’s not always clear.

• Credit card payments: clearly not you problem, no 1099s needed.
• Zelle payments: you DO need to send 1099s for Zelle payments.
• PayPal, Venmo and Cash App payments: this is where it gets tricky. These electronic processors have two payment options: personal for friends and family and business for, well, business. Business-related payments sent as “personal” (which would be a violation of PayPal/Venmo/CashApp terms, btw) DO require 1099s.

I do not have my contractors’ SSNs – what do I do?

Frankly, probably nothing at this point. Try to reach out to them and get their numbers, but it’s not very likely to happen. Chances are, they will avoid you because they are not planning to report this income. Unfortunately, their cheating can become your problem if the IRS goes after you. Which they do, in case you’re wondering.

Take this as a lesson and make sure to get their social security numbers from now on – before they start any work!

How do I get their numbers in the future?

Good question.

Before they start, they need to complete this one-page Form W-9. You can print this one on your computer, no need for the “official” printed forms.

W-9 asks them to enter their name, address, and tax ID – which can be a SSN, ITIN (for people who are not permanent residents) or EIN (business tax ID). They must sign the form.

The IRS offers an online tool that lets you check if the tax ID the contractor gave you matches the IRS records. This system is called online TIN matching, and you will have to sign up for IRS eServices in advance and share your personal information in the process.

My contractor says he is a business and does not need a 1099

He is wrong.

There is an exemption for corporations, both C-corporations and S-corporations. A lot of people mistakenly think that an LLC is a corporation. It is not! LLCs are not exempt – you do need to send 1099s to most LLC owners.

How do you know if they actually are a corporation? They need to check the “Corporation” box on Form W-9 when they complete it, and they must sign. They can also be an LLC that specifically elected to be treated as a corporation – there is a box for this option, too.

If they signed that they are a corporation, as opposed to a single-member LLC – then you're off the hook.

What about DBAs? DBAs are not business entities. You absolutely need 1099s for them.

What about owner-financed interest?

If you’re owner-financing your sold properties and receive more then $600 of interest from the buyer – per property! – you should report it.

This is not a 1099-NEC though! Send form 1098 – to the buyer and to the IRS. The procedure is very similar to 1099-NEC: file it online. Again, the $600 interest threshold is per loan, not per person.

But this was not my money!

Sometimes you receive form 1099 for income that is not actually yours or is only partially yours. This is called a nominee recipient. An example would be when you receive compensation that you later split 50/50 with your partner.

In this case, you need to file your own form 1099 showing payment from you as the payer to the actual recipient. You need to file the same variation of form 1099 that you received and send a copy to the recipient.

Help, anybody?

The IRS instructions for forms 1099 are remarkably confusing. You can try calling the IRS at the special toll-free number: 1-866-455-7438, however their phone lines are usually busy. One more reason to have a good accountant on your team.