Tips on sending 1099-MISC to contractors

[Michael Plaks]

THE DEADLINE IS JANUARY 31!

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 2019, total. If you do not report these earnings to the IRS, you can incur IRS penalties as high as $260 – for each worker!
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: 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 (no affiliation or endorsement):

• 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.

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 2019. 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-MISC in these cases:

• You paid the contractor electronically (like PayPal or credit cards). Electronic payment processors issue 1099s 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 2019
• 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 Socials 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 s 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.

[Adam Rasmussen]

Such a great write-up. Really agree with the point you make about being on the safe side and sending the wholesaler a 1099. The IRS doesn't send fines for sending a 1099 when you didn't need to but they will certainly send fines if you needed to and did not. 

One thing to add is 1099s are due one month after year end (January 31st). This catches people off guard because they always think they have a few months to get them taken care of. 

[Matt Ward]

since we're in a real estate forum, only landlords who are "active real estate investors" need to worry about sending 1099s to my knowledge.  a passive landlord with a couple rentals need not worry.  my understanding is also that "active" would generally mean :

‘regularly and continuously’ engaged in the business of leasing or renting real estate for income or profit

now we enter a grey area of conversation and back and forth, etc. on what this means.... 

just thought i'd drop this out there.... thoughts @Michael Plaks ?

[Michael Plaks]

@Matt Ward

Yes, someone had to open that can of worms. :) 

Pretty much all landlords are interested in qualifying as "trade or business" under Sec. 162. That allows us to take all ordinary business expenses on Sch E, including education, marketing and anything else from the business overhead world. Also, it qualifies the investor for the 20% QBI deduction if they have a net profit. 

Requirements to qualify under Sec. 162 are pretty liberal, so almost everyone qualifies, without that new silly safe harbor. But if we qualify as "a trade or business" - then we become subject to 1099 rules. 

[Patrick Bartlett]

Is this still up to date?

Thank you for the info!

[Michael Plaks]

Quote from @Patrick Bartlett:

Is this still up to date?

It is, Patrick. Tip: Try using @ to tag people you're addressing, otherwise it's likely to go unnoticed. I noticed your follow-up question accidentally.

[Patrick Bartlett]

Thanks! We just closed on our first flip today and I had forgot about this.