Sending 1099-MISC to contractors and vendors
Beginning of the year is a perfect opportunity to get even with all those contractors who worked for you during 2014: report them to the almighty IRS and make them pay taxes on the money they received from you. In fact, it applies not only to contractors but to everyone who did some kind of work for you last year: property managers, wholesalers, mentors, attorneys, and even – yes! – accountants.
Should you even bother?
Your first question might be – why should I? Well, three top reasons come to mind:
- It will allow you to deduct their earnings on your own tax return.
- It is required by law for any person to whom you paid at least $600 in 2014, total. If you do not report these earnings to the IRS, you can incur IRS penalties as high as $200 – for each worker.
- If the IRS gets busy auditing them, maybe they will leave you alone. Or maybe not.
When, where, and how?
The next question is – how do I do it? The short answer is: obtain form 1099-MISC, fill it out, and mail “copy A” of that form to the IRS by February 28th. The long answer is, well, longer:
- Unlike most other forms, 1099s cannot be simply downloaded and printed at home. You need the “official” form which is a perforated 5-part form, with the top layer printed in red ink. The blank forms are available for free from the IRS: pick them up at the IRS office or, if time allows, order by phone (1-800-829-3676) or online. You can also buy blank forms at places like Office Depot. Either way, make sure you have enough: there are two forms per page, and you need one form for each person, plus get a few extra in case you mess up.
- You will need to put the person’s name, address, and SSN on the form. Your information goes under “payer”, and the worker’s under “recipient.” Try to get it right the first time.
- Besides “copy A” of forms 1099-MISC, the IRS will need a cover page – form 1096. If you paid 10 different contractors in 2014, you will send 10 forms 1099-MISC but only one form 1096 for the entire package. Do not forget to pick up this form while at the IRS office – because it also must be the official red-ink form.
- You also have to send “copy B” and “copy 2″ of 1099-MISC to the recipient. In fact, the deadline to do this was January 31st. If you have not provided the form yet, do it right away. Otherwise, you will make angry both the contractor and the IRS, and I don’t know what is worse.
- What if you missed the February 28 deadline? Well, there is another possibility. Since it’s 21st century, you can submit your 1099s to the IRS online, however not directly with the IRS. This service is provided by several authorized 3rd party companies, and a small number of forms is usually processed for free. Google “eFile IRS 1099” to find those providers. The best part: with e-filing, the deadline is extended to March 31st.
Who should receive 1099-MISC?
The only other critical question is – whom do I need to send these 1099s to? The general rule is: to anybody who was paid by you for services (work) or who received a profit distribution from you – if he received from you a total of at least $600 during the entire 2014. This list includes:
- contractors of all kind
- wholesalers and birddogs (but not Realtors!)
- consultants, inspectors, and mentors
- property managers
- bookkeepers, accountants, and attorneys
- landlords from whom your business rents
- your business partners if you paid them
You do not need to send 1099-MISC in these cases:
- You paid the person a total of less than $600 during 2014
- The person who worked for you is a corporation, and you made payments to his corporation. Warning: this exception applies to corporations only. You still need to send 1099s to all DBAs, LLCs, and partnerships. Exception: attorney’s fees must be reported on 1099-MISC even if he is incorporated. The IRS clearly has an issue with attorneys.
- Commissions paid at closing to licensed realtors and mortgage brokers
- Payments for purchasing all kind of goods, materials, and property, including real estate itself
- Repayments of loans
Finally, there are two important cases when you have to send the IRS forms other than 1099-MISC. First one is when you’re seller-financing your sold properties and receive more then $600 of interest from the buyer. You must report the interest on form 1098 – to the buyer (by January 31st) and to the IRS (by February 28th). The procedure is very similar to 1099-MISC: you need an official multi-part red-ink form (unless you do it online), and you need to include form 1096 as a cover page.
The second situation arises when you receive form 1099 for income that is not actually yours or is only partially yours. This is called a nominee recipient. An example would be when you receive compensation that you later split 50/50 with your partner. In this case, you need to file your own form 1099 showing payment from you as the payer to the actual recipient. You need to file the same variation of form 1099 that you received and include form 1096 as cover page, as well as send “copy B” to the recipient.
Although the IRS instructions for forms 1099 are remarkably confusing, you can call the IRS at the special toll-free number: 1-866-455-7438. Unless, of course, you have a good accountant on your team.