The new 1099 Requirement you MUST comply with in 2011


12-15-2010-11

Real estate investors take note: January 1, 2011, is the starting date for new 1099 Reporting rules.

Effective January 1st, you must track payments you make to all businesses and individuals that you buy services from. Once you have paid $600 or more to any one business or person in connection with any kind of rental property expense, you’ll need to report those payments to the IRS, and issue each person or business a form 1099-MISC next January.

Does everyone have to do this? No. The new law makes a specific exemption for property owners who are in the military or the intelligence community and who are renting out properties on a temporary basis (i.e, while you’re on assignment). There’s also a vague reference to anyone who would experience a hardship in complying, although what that actually means hasn’t yet been clearly defined.

So, what information do you need to get? Normally when you are going to send someone a 1099-MISC, you first ask them to fill out an IRS Form W-9. It’s a simple, 1-page form that asks for:

Business and/or Individual’s Name and Address
Business and/or Individual’s status (i.e, corporation, LLC, sole proprietor, etc.)
Social Security Number (for sole proprietorships and individuals)
Tax ID Number (for applicable business entities

HERE IS THE LINK TO OUR FREE DOWNLOADABLE W-9 REQUEST LETTER

On a W-9 form, the Social Security Number and Tax ID Number are the keys. Without these, the IRS can’t properly match up the 1099-MISC forms that you report, with the copies that are filed by the people and businesses you give them to. If you don’t prepare and file 1099-MISCs, or if your data is wrong, it will be on you to fix it or face fines and penalties unless you can show that you properly reported what you were given.

Does this apply to personal expenses as well as business expenses? The requirement to collect Form W-9s and send out 1099-MISCs is limited to those individuals and businesses who receive from the rental of real estate properties. Only those expenses that are connected to your real estate will apply.

Does this apply to goods I buy (hardware, appliances, etc.) as well as services? Not in 2011. In 2011 you will only be collecting information from service providers. But in 2012, additional requirements kick in that apply to goods you buy, plus expands the definition of who gets a 1099 to corporations as well as sole proprietors and individuals.

Who should I send W-9 forms to? All service providers connected to your real estate properties that you anticipate paying more than $600 in 2011. That could include things like: gardeners, painters, plumbers, and so on.

When is the best time to ask someone for a W-9? The best time is now, or as soon as you make your first purchase from someone next year. The later you leave it, the more difficult it can be. You may hire a contractor for a one-time job in April, only to find that company is no more, or the individual has moved, when you try to send a W-9.

What if a company or a person won’t give me a W-9? This is a tough decision. If you don’t have a Social Security Number or Tax ID number, you will be the one paying for it in the end. If someone won’t fill out a W-9, you maybe need to rethink doing business with them. Or, maybe you can make payment of their bill contingent upon receiving a signed Form W-9.

What if someone gives me incorrect information? Your best defense is a signed W-9, showing that you correctly reported the information you were given. That puts the onus back on the individual or business who gave you the W-9 in the first place.

Are you sure I have to do this? What law says that I have to? These requirements were tucked away in the Small Business Jobs and Credit Act, which passed in late September of 2010.

Doesn’t this start in 2012? No. Rental property owners begin collecting data on payments to service-providers in 2011. In 2012, the reporting requirement expands to include goods purchased, and corporations as well as individuals and Sole Proprietors.

I heard that I didn’t have to do this if I paid by credit card. Is that true? Are you exempt from collecting data and tracking payments if you use a credit card to make the payments? There’s been a LOT of confusion on this particular issue. Some say yes, others say no. The latest information we have says … “maybe.” Again, the IRS hasn’t finished creating the rules. Because of that, we can’t in all good faith tell you that you don’t have to worry about it when you use a credit card to pay for things. In fact, our position is just the opposite. Get the tax data you might need from everyone.

Where can I find a W-9 form? You can get one from the IRS’s website, www.irs.gov. And, we’ve also prepared a special 2-page letter that you can use. The front page sets out your request, and even reprints the two pieces of law that apply. The second page is a blank W-9 for the individual or business to complete and give back to you.

HERE IS THE LINK TO OUR FREE DOWNLOADABLE W-9 REQUEST LETTER

I thought Congress was going to fix this? There have been a couple of legislative attempts to kill or push off the new requirements. Unfortunately, neither attempt was successful. Right now, this is the law of the land. Any changes to this requirement realistically won’t come into effect until 2011, if at all.


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22 Comments so far:


On December 16th, 2010 | 7:57 am
Tom Butler said:

Uhmmmm…

Aren’t you a year early on this? Under the law, the 1099 data collection begins in 2012, with reporting beginning in 2013.

So while it’s good practice to begin collecting 1099s in 2011, we don’t have to send out all those additional forms until 2013.

Please prove me wrong on this, but all official documentation I’ve read says that I’m right.


On December 16th, 2010 | 11:38 am
Thomas said:

I’m a real estate investor and have several property managers that manage my rentals. Does this 1099 requirement apply to property managers as well? I just want to make sure. Thx.


On December 16th, 2010 | 2:06 pm
Megan Hughes said:

Hi Tom,

Egg on face, egg on face! You are absolutely right. The 1099 requirements for real estate start in January of 2011, but they are still just for service providers, and only for non-corporations. All of the other changes, including 1099′ing for goods purchased, and 1099′ing corporations, begin after 12/31/11.

Thanks for pointing that out! The post has been revised to reflect the correct information.


On December 16th, 2010 | 2:18 pm
Diane Kennedy said:

Thomas, the requirement for real estate owners does go in effect 1/1/11.

The property manager should issue the Form 1099-MISC for expenses that he pays on your behalf. However, you should verify that he is indeed reporting those properly for you starting 2011. If he’s not, you will need to do so.


On December 21st, 2010 | 8:25 am
Anita said:

I just want to make sure I have this straight… ONLY people who are involved in real estate investing are being required to do this? No such requirement for 1099 issuance will be required for other types of business owners (retail, service industry, etc.)? Realizing the standing rule of 1099 to contractors, independents, and sole proprietors still apply for us. I just can’t imagine having to 1099 Sam’s Club for office supplies.


On December 21st, 2010 | 10:31 am
Megan Hughes said:

Hi Anita,

Yes - the new law applies to people or businesses who who receive rental income from real estate properties. AND for the time being, just service providers who are paid more than $600.

But in 2012, it changes again. At that point 1099 reporting is extended to cover both goods and services, where you buy more than $600 over the course of a year. Plus, it extends to corporations you buy from. So, unless the law changes between now and then, yes, you will be asking Sam’s Club for a W-2 in 2012, and sending them a 1099 for office supplies at the beginning of 2013.


On December 21st, 2010 | 2:03 pm
Anita said:

If I am understanding this right, what you are saying is EVERY BUSINESS OWNER- regardless of their business- will be sending 1099’s to EVERY and ANY company that provides a service- such as doctors, lawyers, accounting firms, upholstering companies, bookkeeping companies, plumbers, electricians, maid services…etc., even though we do NOT have any thing to do with any type of real estate business? Yes?


On January 4th, 2011 | 7:19 am
wallace said:

I have a Sub S corporation that has a few installment sales(residential property). The corporation is used just for these sales. Am I required to issue 1099m to contractors or 1098 to purchasers? If I did would this help the IRS argument that I cannot use the installment method?


On January 5th, 2011 | 12:20 pm
Megan Hughes said:

Hi Wallace,

Yes, you’ll need to start tracking payments to all service providers this year and send out Form 1099-MISCs by 1/31/12.

At this time, we don’t know how this will impact IRS audits of dealer status (which precludes you from the installment sales treatment).


On January 5th, 2011 | 2:21 pm
Anita said:

Megan, you didn’t responded to my second question so I need to ask it again. I understand that in 2011 this new law change effects ONLY real estate based businesses.

But- with what you said about the changes for 2012 and how you said it, I am not exactly clear on what you are telling me.

You said “yes, you will be asking Sam’s Club for a W-2 in 2012, and sending them a 1099 for office supplies at the beginning of 2013.”

I do not have a real estate based business- I have a service business.

Are you telling me that ALL businesses, real estate based or not, will have to send out these additional 1099’s to goods and service providers starting in 2012 or are you saying that the 2012 changes still only target real estate based businesses?

Please clarify.
Thanks again!


On January 5th, 2011 | 2:56 pm
Megan Hughes said:

Hi Anita,

Not a problem.

I’m saying that beginning in 2012, ALL businesses - real estate, service, retail stores, Internet retailers, etc. - will need to track every individual or business that they purchase $600+ in services OR goods from during the year, and will need to 1099 those individuals or businesses by January 31, 2013.

That’s assuming the law doesn’t change this year … which is entirely possible.


On January 5th, 2011 | 3:18 pm
Anita said:

I thought that was what you were saying. Thank you very much for the clarification.


On January 11th, 2011 | 2:31 pm
wayside said:

What if the person providing the service is a non-resident alien? The W9 seems to be only for “U.S. persons”, which includes U.S. citizens and resident aliens.


On January 15th, 2011 | 3:39 am
JR said:

I don’t manage units as a rental agent, but I do manage the building and facilities as a Resident Manager. Would this form apply to the AOAO I am employed by? I would have to do this additional paperwork for all improvements made to the building and grounds? Or even my office supplies???


On January 29th, 2011 | 12:00 am
Nancy said:

First thanks for clearing up when we need to start sending out W9’s. My questions to you, we run a recycling center and we pay cash out to our customers who bring in scrap or cans. In 2012 are we going to have to pass out W9’s to all our customers that bring in their scrap or just to cooperate companies that have EIN numbers? We are trying to figure out who receive the W9 in our line of business.


On May 27th, 2011 | 12:44 pm
Beth said:

I have a real estate brokerage which is a corporation that provides rental services. Do we have to start providing our clients W9s now in 2011? Or are we still exempt until 2012 because we are a corporation? We have clients telling us we have to provide them W9’s now, but if I’m understanding this blog correctly we don’t have to until 2012.


On January 11th, 2012 | 6:26 pm
matt said:

I am a medium size property manager with 60 or so units. I collect rent in a trust account and have 1099′d owners on gross income. I also 1099 the vendors I pay on the owners behalf its part of my service. However recently some owners that hold properties in the llc will not let me 1099 them…they want to 1099 me my vendors..it seems as if some one reports that ids the purpose of the law and he doesn’t want issue double 1099’s to vendors…


On January 23rd, 2012 | 8:15 am
Jessica said:

Ok so this has confused me for the past two years. My accountant cleared it up for me this year but it seems like next year is going to be more complicated.

SO next year basically everyone gets a 1099 unless you paid them with a credit card? Also does this include your utility companies, like electricity, phone, water, and so on? That might be a dumb question but these laws have confused me the last couple years and I just want to make sure I get the 1099s to all the right people.


On January 24th, 2012 | 10:54 am
Megan Hughes said:

Hi Jessica,

You’re certainly not alone in your confusion. As became more apparent just how much work was involved, Congress quietly undid some of these rules. At this point, your best bet is to work closely with your own CPA or tax advisor to make sure you’re tracking what you need to track.


On January 25th, 2012 | 1:08 pm
Charles M said:

I have only SSNs or TINs for 6 contractors out of 24 I paid last year. Should I send 1099s for everyone or just the ones I have w-9s for? Hate to get in trouble for not sending them all but would hate more to trigger an audit because of missing information.


On May 29th, 2012 | 2:32 pm
Brian said:

I own a painting business and am thinking of finding someone to take over one of my properties. I know that i can 1099 that person but will he have to carry his own insurance or will my liability insurance be sufficient for this person that is working under me….

Thanks
Brian


On June 7th, 2012 | 6:02 pm
matthew said:

Please help. My wife and I just became building managers. We signed a contract that states the Managers unit has a value of $1700.00 per month. Will we be 1099 at the end of the year for all this rent?



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