The beginning of the year is a perfect opportunity to get even with all those contractors who worked for you during 2018: 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 31!

Should you even bother?

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

It will allow you to deduct their earnings on your own tax return.
It is required by law for any person to whom you paid at least $600 in 2018, total. If you do not report these earnings to the IRS, you can incur IRS penalties as high as $260 – for each worker!
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: obtain form 1099-MISC, fill it out, and mail “copy A” of that form to the IRS and to the recipient by January 31st. However, these are not forms that you can print yourself– they have to be ordered from the IRS and take weeks to be mailed to you (assuming there are no extra delays from a government shutdown).

Here are some of the online 1099 filing companies:

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.

For the recipients, you can mail them a printed copy or even a substitute statement.

Warning: do not email these! Email is NOT secure, and you will expose your contractors to unnecessary risk of identity theft. If you do send them via email – use passwords and encryption.

Who should receive 1099-MISC?

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 2018. This list includes:

Contractors of all kind
Wholesalers and bird dogs (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-MISC in these cases:

You paid the contractor electronically (PayPal or Credit Card). Electronic payment processors issue 1099’s automatically. If you’re not sure if your processor issues 1099s, be sure to check their terms of service.
You paid the person a total of less than $600 during 2018
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. Exception: attorney’s fees must be reported on 1099-MISC even if they are incorporated. The IRS clearly has some trust issues with attorneys.
Commissions and fees paid at closing to licensed realtors and mortgage brokers
Payments for purchasing all kinds of goods, materials, and property, including real estate itself
Repayments of loans

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.

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?

In this case, when you have to send IRS forms other than 1099-MISC. If you’re owner-financing your sold properties and receive more then $600 of interest from the buyer – per property! – you should report it.

Send form 1098 – to the buyer and to the IRS. The procedure is very similar to 1099-MISC: you need an official multi-part red-ink form (unless you do it online), and you need to include form 1096 as a cover page. Again, the $600 interest threshold is per loan, not per person.

And yes, you are better off using an online service, the same ones you can use for your 1099s.

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 include form 1096 as cover page, as well as send “copy B” to the recipient.

Instructions for paper filing

Don’t even try. Use an online service for 1099s.

Help, anybody?

The IRS instructions for forms 1099 are remarkably confusing. Unless, of course, you have a good accountant on your team.

Michael Plaks

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Remember to send your 1099s by January 31!