Do I Need to Issue 1099s?

Question

Hello! My husband and I bought our first apartment buildings this year. We bought them in our own names. My dad has done a lot of handy man type jobs for extra income: painting, new faucets, flooring, etc. He is a teacher full-time, so he just did this for us on the side. We did pay him over $600 this year. He has a friend who is a retired plumber that we paid over $600 for some work as well. We also paid Roto-Rooter over $600 (split between 2 occasions) and have paid half upfront to a roofer but they haven’t started the job yet and won’t before the year ends. So my question is, do we need to issue 1099s for all these people? Only some of them? I own a business so I am familiar with the process and have issued them for the past several years. But I wasn’t sure since we own the buildings in our names (although we do own an LLC called Mathis Properties, but buildings are in our names) and also wasn’t sure about the individual circumstances regarding those we paid (either not businesses, or paid out on separate occasions, or work not completed yet). Any help would be appreciated!

Jon Rusnak · Answer

@Jill F.

Good point.  Something I've found as an easy solution to this is to give them a heads up that you will be filing a 1099 but agree to cover the income taxes on said 1099.  In my eyes this is a fair solution to all involved and keeps the relationship in a good spot.

Eamonn McElroy · Answer

This is discussed many times around BP.

And most participants involved in those discussions are non-practitioners giving their opinions or reiterating what they've read online, which is why there's so much disinformation surrounding the topic.

It's pretty simple.  If you have a trade or business, issue 1099s.  A trade or business may be conducted through employees or agents (e.g. property mangers).  A trade or business can also be passive.

If you merely have an "investment", as opposed to a trade or business, 1099s are not required to be filed.

Case law has generally shown that even one rental can rise to the level of a trade or business.  The exception is the second circuit.  If you're located there, a more in-depth discussion with your tax professional might be in order.

If you're taking the position year-to-year that your rentals are mere investments and the activities doesn't rise to the level of a trade or business, you might be in quite a catch 22 should you ever sell at a loss...

Linda Weygant · Answer

Completely agree.  Also, consider that a contractor that cuts corners in this way to save money is probably also cutting corners to save money in the work they do.  Worth it?  You decide.  For myself, no.  I do business with people who are professionals.  Part of being a professional is paying your freaking taxes.

Jill F. · Answer

I do know if you hire a trade for side work and don't tell them you're going to1099 and get the ein or ssn up front, they are going to be p*ssed off and probably never work for you again because there are usually two prices  for work... just sayin'...

Jon Rusnak · Answer

@Linda Weygant we're talking about family here.  I'm sure dad is giving a good price.  Dad is probably paying his share of tax but everyone's situation is different and it was a suggested solution to not make the situation any more complicated.

Benjamin Aaker · Answer

I'm not an accountant and the best advice is to speak with your accountant.

That being said, each of these people made income over the year and need to pay income tax on that. The government won't know how much they made without those pesky 1099s and may never know, but if found out, you could be in some hot water for not submitting them. I think it is a small monetary penalty. I don't think Uncle Sam will look at it any differently if you paid out of your personal account vs your business account.

Another bit of advise is to get that W-9 filled out before paying any money. Some contractors are hard to track down after. Some don't want to be found because they are trying to avoid paying tax.

Vince Mathis · Answer

Not a CPA, not a Tax Professional, but I am a Mathis!

From what I have found as I begin to file my own taxes, is that if you are a Passive Investor, and file your Rental Income on a Schedule E, then you are not required to provide 1099s. Landlords of only a few properties that do not require more than collecting rent and facilitating occasional repairs are not considered to be in the capacity of a business. If you were a flipper than you would be considered actively engaged in business and would be required. Passive Landlords also do not have the ability to put schedule E losses against active income, as one can with a business.

This is discussed many times around BP.

If you tend to be more conservative with your risk, you could provide 1099's. There is nothing saying you can't, but there is nothing saying you must.

Michael Plaks · Answer

@Kaybreh Mathis

Yes, you should, unless you paid via some electronic processor like credit cards or PayPal.

@Vince Mathis It's not about Schedule E or passive income, it's about being classified as a "trade or business" which owning an apartment complex almost certainly is.

Linda Weygant · Answer

Cool.  So for all my clients, I should ask them to pay my tax bill too?  Or, should I maybe price my services so that I can pay my own taxes?

Lynnette E. · Answer

If you are a business or want to be a business file them.  If you do not want to be a business or are not a business do not file them.  Filing them can help classify you as a business since you would be following the business rules.

From NOLO:

Do Landlords Need to File Form 1099-MISC?

All landlords should file Form 1099-MISC to qualify for important tax benefits including the 20% pass-through deduction.

By Stephen Fishman, J.D.

Need Professional Help? Talk to a Tax Attorney.

Please answer a few questions to help us match you with attorneys in your area.

If you're a landlord, do you need to file IRS Form 1099-MISC to report payments you make to independent contractors, such as property managers and repair people? Surprisingly, until now, it has never been clear. Some people believed landlords didn't have to file 1099s at all, or needed to file them only if they wanted to qualify as real estate professionals for purposes of the passive loss rules. Until now, the IRS never provided a definitive answer. However, the IRS has recently made it clear that all landlords should file Form 1099-MISC.

The reason a landlord should file Form 1099-MISC is to help the rental activity qualify as a business for tax purposes, instead of an investment activity. By doing so, you can qualify for several important tax benefits that are only available to businesses--for example:

• the pass-through tax deduction, which can allow you to deduct up to 20% of your net rental income each year through 2025
• the home office deduction
• the deduction for the cost of attending rental-related seminars and conventions, and
• the start-up expense deduction.

Additionally, when your rental activity qualifies as a business, you get the best possible tax treatment when you sell your rental property. Any gains are treated as capital gains, which are subject to a lower tax rate than ordinary income. If you sell the property at a loss, you may deduct the loss without limit against all your income. Such losses are limited to $3,000 per year if your rental activity qualifies as an investment activity, not a business.

Filing 1099s Can Help a Rental Activity Qualify as a Business

One of the most significant changes brought about by the Tax Cuts and Jobs Act was the creation of a brand new tax deduction for pass-through businesses. Pass-through business owners who qualify may deduct up to 20% of their net business income from their income taxes during 2018 through 2025. Landlords whose rental activity qualifies as a business may take the pass-through deduction.

In its final regulations on the pass-through deduction, the IRS discusses how to determine if a rental activity qualifies as a business. It says that “taxpayers should consider the appropriateness of treating a rental activity as a trade or business…where the taxpayer does not comply with the information return filing requirements." Information returns means filing Form 1099-MISC. In other words, it may not be appropriate to treat a rental activity as a business if a landlord does not file all required Forms 1099-MISC.

This is something the IRS has never said before. So now we know: Landlords should be filing 1099s. Failure to do so is a mark against you if the IRS ever questions whether your rental activity is a business.

When You Need to File Form 1099-MISC

Fortunately, filing Form 1099-MISC is not an onerous requirement. The basic rule is that you must file a 1099-MISC form with the IRS if you pay an unincorporated independent contractor $600 or more during a year for rental-related services. It makes no difference whether the sum was one payment for a single job or the total of many small payments for multiple jobs. This includes payments to property managers, repair people, and anyone else who performs services for your rental and is not your employee.In calculating whether the payments made to an independent contractor total $600 or more during a year, you must include payments you make for parts  or materials the independent contractor used in performing the services. For example, if  you hire an electrician to rewire a rental building and he charges you separately for the electrical wiring and other materials he installs, the cost must be included in the tally.

You need to file Form 1099-MISC only if you pay an independent contractor $600 or more by cash, check, or direct deposit during the year. If you pay an independent contractor by an online payment service like PayPal, credit card, or any other type of electronic payment, you don’t need to file a Form 1099-MISC reporting the payment to the IRS. PayPal or the other payment service may have to report the payment; but this is not your problem.

Do I Need to Issue 1099s?

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