Did you pay independent contractors more than $600 in a tax year? You better get that social security number or federal tax ID number. No ID number, no tax deduction. Don’t get sideways with the IRS, they can be brutal. The last thing you need is an audit that may open other things that you forgot to do. You must by law file a form 1099 for any contractor individual or entity you paid more than $600 in a single tax year.
A contractor who fails to report their information on the W-9 form will subject themselves to mandatory backup withholding for estimated income and other taxes. The last thing you want to do is start deducting from your contractor’s payments. If you want to avoid the extra accounting headaches get that W-9 form completed.
Don’t let the contractor tell you they are exempt. They probably are not and regardless, that’s not your decision to make. Get that W-9 form and make sure the information listed is correct. No more cash payments that go unreported. The newly remodeled IRS is ready to dig deep.
A w-9 form is online
The process is simple, go to the IRS site here and complete a W-9 form online. Enter the name and other information for the contractor. Save the form and email it to the contractor to fill in their social security number or business federal tax ID. When this is done, they send it back to you. It’s probably best to hand it to the contractor in person and have them sign and give it back to you.
Hold the w-9 form and use it to create your 1099-misc or 1099-NEC form which you will provide to the independent contractor by the deadline, usually January 31 (with COVID and other issues there have been different dates so check).
If you send the 1099-misc form or 1099-NEC form to the Internal Revenue Service without a taxpayer identification number, you will eventually be notified to acquire it. Should obtain incorrect information or fail to obtain the tax ID number, you will be denied the tax deduction for those payments.
Two forms are available
Two forms are used to report funds over $600 per year paid to an entity. The 1099-NEC (non-employee compensation) is used for payment to individuals who report as self-employed. An example is a gardener who cuts the lawn at your business but is an individual not working for a company.
This person is responsible to pay their federal income tax as a self-employed person. Use form 1099-Misc when you are paying a business or for rent. Property managers who pay property owners rents collected on their properties would receive a 1099-Misc. The due date for both forms is the same, January 31.
The whole concept of non-employment income comes under strong scrutiny by the Internal Revenue Service. Should you pay what you believe to be an independent contractor to perform work (called gig workers) they may be considered employees by the IRS. Should the IRS consider your “contractor” as an employee, you will be subject to a levy for employers’ Social Security, and Medicare taxes, and your state will require you to pay any state employment taxes. There is a fine line between self-employed individuals and employees.
As with any issue dealing with the Internal Revenue Service or state tax agency, you should seek help from at minimum the IRS website. Soliciting legal advice or working with a CPA may help you determine if the person in question is an employee or a true independent contractor.
Rental Property Managers
The IRS requires property managers to issue 1099-Misc forms to all property owners who receive income from rental property managers. Often the owners of properties managed by the rental property management business will not be expecting the 1099-Misc form the first time. I recommend that you send an email notifying them that they will receive one before January 31.
Some people try to file their taxes early. If they are unaware they will receive the form from you, they may file it before you send the form. Also, some property owners may have been renting their properties on their own and not reporting the income before your company was engaged. You may want to advise those who have not created a business entity to own their property that they should. When they do, you can issue the 1099-Misc to that business which will have a federal tax identification number.
Check with your CPA about how to issue the 1099-Misc. Some property managers enter the total received from the renters/guests in block number 1 “rents”. Others enter the net amount paid to the owners after deducting the management fee.
I have always used the following as a start:
- An individual has provided a w-9 listing a business name. The business has an employer tax identification number.
- The individual has other sources of income e.g. they work for other companies and will provide a list in writing
- Ask the individual to show her/his Social Security Card
- Always have an end date for work on a contract basis. Use an agreement for tax purposes.
- If you work with an individual, ask your CPA to provide that person with some direction about income taxes, taxable income, and tax forms. Some new contractors do not know the system.
- Your hire is employed at least part-time with another company and will provide documentation
- The miscellaneous income you provide is not more than 50% of their total income from other gig-type jobs
- New contractors should sign a document indicating the above information and agree should their situation change, they will notify you in writing.
- Encourage the contractor to create a business and obtain a federal tax id number. Issue the 1099-Misc in the name of the business.
The items above will help prevent you or your business from being tagged as an employer but again, it’s best to seek professional advice from your tax advisor before tax time. Often real contractors will have formed a limited liability company which is a great help. The assumption is that they are paying their taxes since they gave you their business tax ID.
The main difference between an employee and a contractor
The main difference between a contractor and an employee in the eyes of government agencies is the fact that the person is only working for you or is they working for others. If for only you, there is a presumption that they are an employee. It’s always best if they are also working for others unless they have created their own company.
There are potential IRS penalties if you do not issue the 1099 forms by January 31st of each year. I suggest that you have contractors that you have paid cash, debit card, credit card payments, or other forms of payment gather the W-9 form at that time. If you do not have W-9 forms from each individual or business that you have paid more than $600 don’t waste any time in getting the data now.
That employer identification number is the key. When you have that and their other information, you can start preparing the 1099 forms. If you worked with a person and provided cash payments of over $600 on a one-time basis, complete the W-9 before you pay them. Cash payments are problematic anyway because there is no paper trail.
Gone are the days of “under-the-table” payments
Consider issuing checks or an online type payment with an electronic trail to support your deduction. Gone are the days when you can pay someone “under-the-table” and expect to avoid reporting it on your tax return. Small business owners should record every transaction they make, funds coming in and going out. Should you fail to report non-employee compensation to the IRS, you could be fined when the IRS is notified by the recipient of the income they received from you.
There are situations when the person receiving the payment from you is obliged to report the income for a wide variety of purposes e.g. child support etc. Don’t get caught trying to game the system.
The current administration has provided funding to hire 80,000 IRS agents to investigate self-employment income and verify that federal taxes were paid. They can audit a bank account and insure that all appropriate self-employment taxes have been paid as required. They follow threads from one person to a business to another person.
All entities that pay more than $600 must file 1099 forms
If you are a sole proprietor or any business you are still responsible for issuing the 1099 forms. The law does not apply just to people who own their businesses but to every individual. The law states that if you earn more than $600 you must report it as income. On a real-life basis, the IRS would probably not track you down if you failed to report the neighborhood teenager that earned $650 from you.
If you fail to get that IRS form w-9 completed before the work is complete and you make payment, you may be out of luck tracking them down later. You may be a person who hired illegal aliens to do work and paid them a few thousand dollars for a new fence around your office. Since they are not legal and have no tax ID number, you will not be able to deduct that payment, your CPA will have to determine where that payment should be classified.
The best way to insure that you are always in compliance is to have the new contractor fill in the IRS form w-9 before they start working for you. Print some blanks out from the IRS website and have the contractor fill them in. Don’t forget about the other items you will need as mentioned above.
File by mail or at the IRS Website
When it’s time to create the form 1099s, gather all of the W-9 forms and use them along with data from your accounting system to create the IRS form 1099-misc or 1099-NEC for each person. The forms come in a package and they are available at no charge if you order them from the IRS directly (order after December 10). The best time to order them is before the end of the year. There are many private suppliers also. Office Depot sells them along with other retailers.
When you have completed the form, you must fill in the transmittal of U.S. information returns and attach the IRS copy of the form. The form package will contain a copy for your state, the person you are paying, and a copy for your records. If your state has a state income tax, you must send them a copy. The IRS does not provide mailing addresses for state returns, you will have to look up the address on your own.
Get the forms in the mail by January 31. You can also file with the IRS using their electronic filing system called FIRE by going to www.IRS.gov/FIRE
The following is from the IRS website regarding FIRE:
“Any entity that needs to file information returns can file electronically via the FIRE System. Any corporation, partnership, employer, estate, or trust that files 250 or more information returns for any calendar year must file electronically. We encourage filers who have less than 250 information returns to file electronically as well.
Warning: Many websites pretend to be the Internal Revenue Site and they come up first on searches of any keywords such as 1099. They will offer you services that are free from the IRS. Some accounting programs claim they can electronically submit your 1099’s to report payments that include Quickbooks.
Please read other articles on our blog page and browse our website. Listen to our podcasts. Try this article on locating the best property manager for your rental. This article explores Handymen not paying taxes on their income
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