Remember Form 1099s and W-2s

[Diane Kennedy]

Just a reminder that you need to get Form 1099s and W-2s out by the end of the month.

Most people know about the W-2s, but Form 1099s can get tricky.

If you pay anyone $600 or more for services then you need to give them a Form 1099-Misc. There is an exception for the Form 1099-Misc, miscellaneous income, if they have a corporation.

So, if you paid them personally or through an LLC that hadn't elected to be taxed as a corporation, then you have to issue a Form 1099-MISC.

Hopefully you got a Form W-9 from them when you paid them! Otherwise, you're going to have to track them down for their social security number or EIN.

Oh, one exception to the above - you need to prepare a Form 1099-MISC for any legal fees, regardless of whether the attorney operates in a corporation or not.

[taiteen]

We encountered many property contractors (general, handyman), that are not willing to complete form W-9 for us to issue form 1099-MISC. Is there a way around it that we can use them for our property rental repairs? Would a independent contractor agreement form be sufficed for us to deduct our expenses along with the receipts/invoices.

[Diane Kennedy]

If they won't give you a Form W-9, don't pay them.

I hate to be such a hard nose on this, but there really isn't anyway around it. An independent contractor needs to get a Form 1099.

The new Health Care bill expands that requirement. Now if you have a rental, you have the same requirements as a business owner. And you have to give Form 1099's for products, as well as services. And you have to give Form 1099's to corporations. Basically everybody gets a Form 1099. And if you don't issue them, the penalty for failure to file is on you.

[jesdale]

Hi Diane,

For further clarification, this only applies if you are paying for expenses related to your business, LLC or rental property, not for a painter working on your private residence. But what if you claim a home office deduction for your LLC?

If you pay an independent contractor for plumbing or lawn service over $600/yr for work done on rental property, you must issue a 1099 misc. But other companies you pay over $600/yr for expenses related to your rental property to such as pest control, or utilities, like electric, cable, water - no 1099, because they are corporations, right?

However, when you are returning a rental security deposit over $600 you don't need to issue a 1099; and you claim the security deposit as income when you receive it and then deduct it as an expense when you return it, right?

Thanks

[Diane Kennedy]

Jesdale,

Good questions here!

When you're returning a security deposit, no you don't need to do a Form 1099.

On the home office question, I haven't seen anything definitely one way or the other. But, I would think since it is a business that even if you indirectly take the expense as a deduction (ie, 10% of your house is used for a business and so you get to take 10% of the painting expense), that it means you need to Form 1099 the painter. But you'd 1099 him for everything. At this point, I think it's better to err on the side of caution here. So that means if you have a home office, you need to collect Form W-9s on everybody.

[wayside]

you claim the security deposit as income when you receive it and then deduct it as an expense when you return it, right?

Perhaps this varies by state, but in my state (MA) a security deposit must be held in escrow, and it is not income when you get it because you do not take ownership of it; nor is it an expense when you return it. (If you keep any of it to pay for damages, that portion becomes income at that time.)

Last month's rent, on the other hand, is considered income when you receive it, and when the tenant is in their last month you have no income for that month.

[Diane Kennedy]

That's interesting about needing to put in escrow. I've never run into that in any of the western states we've invested in.

[wayside]

Security deposit rules in MA are borderline insane on how regulated it is, for example the font size and weight on the forms is specified by law - use the wrong font size and you could be liable for damages of triple the size of the security deposit.

Many RE attorneys here recommend not even collecting a security deposit because it is so hard to correctly follow all the rules. If a tenant takes you to court over it, the chances of them winning are very high, and then you face triple damages.

[taiteen]

I have a follow-up question on issuing 1099-MISC. My CPA informed me that I don't need to issue a 1099-MISC for professional services, i.e. bookkeeping, legal/attorney, or CPA. However, when reading the IRS 1099-MISC instructions, it states to issue for services that were paid $600 or more. I also read the exceptions and they are NOT included. Please clarify the rules/regulations for us. Thanks!

[Diane Kennedy]

You do need to issue Form 1099's for lawyers if you paid over $600. If your other professional providers (like your CPA) operate in a corporation, you don't need to 1099 them.