A new federal will greatly affect how landlords do business in 2011.
In September 2010, a small provision affecting landlord was tucked into the Small Business Jobs Act of 2010, which has now become a subject of concern to many of us. Not only will this new law create a lot of additional paperwork for landlords, but it may open up Pandora’s Box should you be audited.
The new law requires all people who own rental property to issue a form 1099 to any service provider that is paid more than $600 per year starting as of January 1, 2011. The 1099 would have to be issued to the service provider and to the IRS.
Prior to this new law being passed, only landlords whose real estate activities were considered to be a “trade or business” had to issue 1099’s to service providers. Now, even if you own only one duplex or a single-family rental property, and continue to maintain a full-time job doing something other than landlording, you will need to comply with this new law.
Landlords will now be required to obtain certain information from their vendors/contractor, such as their name, address, and social security number or tax identification number. You will also need to keep track of the amount of money that you pay the vendor/contractor over the course of the year. If you pay them more than $600 within the tax year then you must reflect that income on a 1099.
Under this law, landlords will need to issue a 1099 to most all contractors/vendors regardless of whether they are a corporate entity or an individual. This will include handymen, plumbers, carpet cleaners, electricians, painters, gardeners, landscapers, accountants, lawyers etc. etc.
If you give one of your current tenants a discount on rent for looking after your rental property, shoveling snow in the winter, and mowing the lawn in the summer, and that discount adds up to $600 or more over the course of the year, you will need to 1099 them as well. Basically you will need to issue a 1099 to all service providers who you pay $600 or more within a year and who are not employed by you and already receiving a W2.
The proposed penalty will be $100 per instance and possibly higher if the Feds believe that you intentionally failed to comply with the law. You could also lose the ability to deduct the payments to the service provider from your taxes, if you do not have a matching 1099.
As my friend and fellow AASEW board member Tim Ballering, so accurately pointed out, this new law has much deeper consequences than a $100 fine for failing to issue a 1099 to your handyman.
If you submit a deduction on your taxes without a matching 1099 you have just tipped off the IRS or your state taxing authority, and increased the possibility of being audited. Additionally, once you file a 1099 for each service provider that did work on your rental properties — just think how many 1099 this could potentially be — the Feds may very well look at all of that new paperwork and wonder if some of those so called independent contractors shouldn’t more properly be classified as a statutory employees instead.
Essentially, all of the 1099’s that you will be required to file may now alert the IRS and the Wisconsin Department of Revenue to investigate whether or not these contractors should be reclassified as “employees.” If such a reclassification would happen, a landlord could be placed in a very painful and expensive predicament. Fines can be as large as $5,000 per employee. You would also be required to pay both the employer and employee’s taxes (that should have been withheld had the contractor been properly classified as an employee), penalties, and interest. The IRS has indicated that they expect to collect an additional $7 billion per year as a result of this provision.
Not only can improperly classifying an employee as a contractor involve the IRS or Wisconsin Department of Revenue, but it could also provoke other government entities to investigate the independent contractor vs. employee issue – think unemployment compensation and worker’s compensation insurance.
While the tests for whether or not someone is an employee for purposes of UC, WC and tax purposes are slightly different, there are commonalities. If you are paying the service provider by the hour, if you provide them with supplies, if you provide them with tools, if you control how and when they do the work – there is a strong likelihood that they are statutory employees and you should have been doing withholding, and paying both unemployment insurance and workers compensation insurance.
So not only will this new law result in a lot of additional paperwork for landlords, it could put many of you in a position to lose everything that you have worked so hard to build. I would strongly recommend that all landlords take the time and effort to determine if they are improperly classifying an employee as an independent contractor. Any money that you think you are saving up front by avoiding the proper withholdings will be greatly overshadowed by the back taxes, fines, interest, and potential loss of your business, if the government later determines that your classification was wrong.
2/22/11 – UPDATE: On February 17, 2011, the House Ways and Means Committee, by a vote of 21-15, approved H.R. 705, the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayment Act of 2011. Among other things, H.R.705 seeks to repeal IRS Code section 6041(h), which was added by the Small Business Jobs Act of 2010, and which treats recipients of rental income from real estate (i.e. landlords) as engaged in the trade or business of renting property for information reporting purposes starting in 2011.
So this new 1099 law may still be repealed. Stay tuned . . .
3/8/11 — UPDATE
On March 3, 2011, the House approved a repeal of the expanded 1099 information reporting requirements by a vote of 314-112. The bill, called the Small Business Paperwork Mandate Elimination Acot of 2011 (H.R. 4) would repeal the 1099 provisions of both the Affordable Care Act (“Obamacare”) and the Small Business Job Act which required business — including rental property owners — to file a 1099 with the IRS reporting any purchases of services or goods over $600 per year.
The rub is that the new bill attempts to pay for the alleged costs of the repeal by requiring people who had received tax credits to pay for health insurance under the health care reform bill to repay the subsidies if they end up earning too much during the year to qualify. Seventy-six Democrats in the House opposed H.R. 4 because of this offset provision.
Apparently everyone — Republicans and Democrats alike — favor the repeal of the new 1099 laws, now it is just a matter of finding a way to pay for the repeal that everyone can live with.
4/7/11 — UPDATE
The U.S. Senate has passed H.R. 4 which repeals the new 1099 reporting laws for businesses and rental property owners. The vote was 87-12. Since the House had already passed this bill — and no modifications were made by the Senate — the bill will now go to the President for his signature. While the President has indicated that he did not care for the “pay for” (offset) provisions that were included in H.R. 4, he has supported the repeal of the 1099 reporting requirements, so it is believed that he will sign the bill into law.
4/18/11 – UPDATE
President Obama signed H.R. 4 into law today. So all new 1099 reporting requirements for landlords are gone. The law now goes back to what it was prior to the 2010 legislation (Small Business Jobs Act and Obamacare). For more detail refer to my 4/18 post on the topic.