by Lex Shan
Note: If you already hired us to manage your property, you can disregard this. If you are managing your property on your own, then you may want to read this article.
The tax rule that is commonly applicable for contractors or freelancers is now required for landlords. What is this rule? They should file a 1099-MISC and they need to collect W-9s. Take note that these two forms should ALWAYS go together.
What is 1099- MISC tax form?
A 1099 is an information filing form that is used to report non-salary income to the Internal Revenue Service (IRS) for federal tax purposes. There are 20 variants of 1099s but the most popular is the 1099-MISC. If an employer pays an independent contractor more than $600 in a financial year, the latter needs to complete the 1099-MISC. An individual must also accomplish the form if the income is obtained from the sale of personal property, tax dividends, prize winnings, or even credit card debt forgiveness. Hence, landlords are included in this mandate.
In a nutshell, 1099-MISC denotes the total declaration of earnings of an employer or commerce. It reflects a company’s paid services to contractors, which must be reported to the IRS-they want to know how much these contractors receive to make sure they pay the taxes that they owe. Furthermore, IRS uses the data to verify the contractor’s independent income dispensation, as well as their income tax levels.
Landlords are not exempted
Back then, 1099-MISC was only used by small business owners who hired contractors for their start-up companies. The United States government then began to require all small and medium-scale enterprises to file a 1099 MISC form. This meant that even landlords need to file this form. What could be the rationale? Â
- Qualified rental activities are taxable
The reason behind this is to tag rental activities (a place or land) as qualified businesses for tax purposes. On a brighter note, the property owner may be eligible to (?) get the best possible tax treatment when they sell their rental property.Â
- Failure to comply shall be penalized
Failure to submit this form to IRS could result in penalties with an increasing amount. For example, if you intentionally fail to file, you may be subject to a penalty as high as $550 per return or statement as per IRS.
- Data is needed for monitoring purposes
Landlords need to file the form for transparency and for monitoring their income dispensation. In the same manner, it is important to file 1099-MISC to avoid overlooking important requirements, which may result in conflicts and penalties that the IRS will eventually enforce. Surely, if that would happen, this may impart such heavy yoke of a burden to landlords.
Why W-9 goes with it
Form W-9 is a “Request for Taxpayer Identification Number and Certification,” as a means for you to obtain the data required from your vendors in order to file the 1099s. It asks for a business name, business entity (i.g. estate or “other”) and the business’ tax identification number. It also provides you with verification that you complied with the law, should the individual provide you with incorrect information. Therefore, it certifies that the person filling it out is not subject to backup withholding.
It is highly recommended that you ask your potential vendor or independent contractor to complete the Form W-9 prior to engaging in business with him or her. Many landlords overlook this requirement during the year. And when the end of the year arrives and it is time to issue 1099-MISCs to service providers, they realize they have not collected the required documentation. Realize that it is difficult to acquire information from some contractors and vendors, especially if they have no intention of reporting and paying taxes on their income.
When it comes to being a property owner, there’s an abundance of administrative tasks that comes along with it. If you own a property with income potential, you may want to consider recruiting the help of a professional property management company. Part of their job is to make yours easier! They will ensure that you have a checklist of the required paperwork and steps on how to get there. If you are a first-time landlord and not sure how to navigate, consult with Reggie, our resident property manager at The CAL Agents, to get the conversation started. If you are our client, then you already know that we are going to take care of this for you!
