Posted by Natalie-VA on January 31, 2011 at 15:08:30:
Good points, Frank, about buying supplies from local businesses. I guess most of the ones I deal with are corps, so I don’t have to worry about it.
–Natalie
Contractors & 1099s - Posted by Tracy
Posted by Tracy on January 27, 2011 at 14:59:39:
We are having difficulty in getting contractor’s TINs to file 1099s for work we paid out in 2010. What do we do with these contractors and for ourselves in this situation?
Thank you!
Re: Contractors & 1099s - Posted by Natalie-VA
Posted by Natalie-VA on January 30, 2011 at 11:41:23:
Tracy,
You are definitely going to want to talk with your CPA, because my answer will contradict some of Frank’s points.
First, you get the contractor to fill out a W9 form BEFORE you pay him. As you are finding, it’s very difficult to try and get this paperwork later.
Second, you send 1099s to everyone who was paid $600 or more during the year, except for corporations. If you are unsure if they are incorporated, ask them to fill out the W9. That form will indicate their form of business.
So, you are sending 1099s to sole proprietors and LLCs. Some LLCs are taxed as corps, but it’s not your duty to know that. Just send them a 1099.
Lastly, you 1099 the contractor for the entire amount you paid them, not just the labor. It’s the contractor’s responsibility to show that part of that money might have been material that he can expense.
Okay, we’ve probably confused you more with our contradictory answers. Just know that you’re doing the right thing and running your business appropriately by sending out 1099s. Don’t support people who avoid paying what they owe.
–Natalie
Re: Contractors & 1099s - Posted by JT-IN
Posted by JT-IN on January 29, 2011 at 12:07:42:
As Frank mentioned, 1099’s required for those that were paid $ 600 or more in any year and are unincorporated entities. Of course there is nothing wrong with filing a 1099 for a corp or LLC that you paid funds to, and even for those that you paid less than $ 600 to as well. No penalty for exceeding the requirement on reporting.
So it sounds like you paid contractors funds w/o having a SSN or EIN. If you’re unable to obtain the number at this time, you would simply file the 1099 with the info that you have, absent the SSN/EIN, and mail the contractor their required copy. The IRS can fine you $ 50 per record for not reporting the SSN/EIN, but I have not seen that to be the case. It seems that they routinely don’t penalize the filer, so as not to discourage any employer/payer from reporting income paid. Believe me, if you have the name and address correct on the 1099, they have the correct SSN/EIN on file, and they will assimilate the income and respective taxes owed for the acct. It simply turns it into a manual task, but they are staffed to handle the challenge.
Re: Contractors & 1099s - Posted by Frank Chin
Posted by Frank Chin on January 28, 2011 at 07:10:11:
I’ve landlorded and rehabbed for about 30 years, and never once had I issued 1099’s to contractors. Is your RE business under an LLC, or are the properties owned individually??
I done all of it individually, and as far as I know, I was never asked why I didn’t 1099 people whom I paid. Friends of mine had kitchens, bathrooms done, and no one I know ever issue 1099’s to contractors who came by to do work.
One important point is 1099’s are for compenstation, and I have done work for a client who felt he had to follow the law and issue 1099’s. As I invoice all my clients, and report the income, so that was no problem.
The problem came up after I filed my taxes, and the IRA came after me because I “under reported”.
Now, when I report my taxes, and at the time, under the schedule C, the report wage income, and sale of goods separately. As an example, I did IT consulting work which involves writing a program, trouble shooting systems, and installing software. All of this is compensation which I have to pay income tax, and FICA.
On the other hand, I also resell hardware, and purchases of those should not go on 1099’s. As an example, I sold a number of computers, totally over $10,000, and my client included equipment sales in my 1099’s.
When I advised my client, that the 1099’s was done incorrectly, he was shocked, telling me that he thought he had to report everything he paid me under 1099’s as compensation. I told him if I paid $8,000 for equipment, resell it to him for $10,000, I’m not about to pay taxes, and FICA on the whole $10,000.
That’s why for regular homeowners, don’t mess around issuing 1099’s if you don’t know what should go onto a 1099.
Re: Contractors & 1099s - Posted by Frank Chin
Posted by Frank Chin on January 30, 2011 at 14:01:48:
Natalie:
At my non-profit employer, I have my contractors issue invoices for labor, and non-labor separately, and they are charged to separate accounts. The 1099’s only reflect what we pay for labor.
I had a bad experience once doing consulting work for a client via my “S Corp”, and had a client that had everything down as labor, and his theory is just let Frank and the IRS figure it out.
Four years after the taxes were filed, the IRS wrote me saying that my return didn’t match the 1099’s. It turned out they had all $60,000 that year down as consulting fees, but I did around $30,000 in consulting, and another $30,000 selling computer equipment. I had to go through my garage, dig out my paperwork from 4 years before, and forward them to the IRS.
Meanwhile, I got hold of my client, and they were no help as they had trouble with their files going back four years. This gone on for a year, and in between, I had a meeting with the controller of the company, and he recalled telling the AP clerk to book certain invoices to purchases, not consulting fees.
The easy thing is for the client to review the records and issue a 1099 correction. Unfortunately, at the time, the company filed bankruptcy, and had no one to corroborate, and went out of business soon after.
Finally, the IRS accepted my records as the correct ones.
Now, it kicks my temperature up a notch when someone just figures they’ll issue a 1099 and let the vendor deal with the IRS, and let them sort out the details. I was one of those vendors that had to sort out the details, instead of doing “paying” consulting work, and it still upsets me thinking about it.
If anyone is to do good by the IRS, make sure they follow the law as they should, just as if you report a crime to the police, verify first that it’s a crime.
What galls me was he didn’t even have to 1099 me as an S Corp to begin with.
Re: Contractors & 1099s - Posted by Frank Chin
Posted by Frank Chin on January 30, 2011 at 06:01:01:
JT:
A few comments.
At my employer, each year after issuing the 1099’s, I’ll get a form letter reply from the IRS saying that the TIN# reported is either missing or does not match any they have on file.
In the case of one dance instructor, I’ve been getting one on her for several years, and the IRS apparently sends her a letter as well. She mentioned it to me once, and I asked, “is the number on the 1099 correct”??, and she said yes. So asked my CPA, and his answer was “unless you get a followup letter, leave it alone”. So I did.
Then last year, she mentioned that she looked at the 1099, after all these years, and noticed two digits reversed on her SS#. So I corrected my records, and I’ll see if I’ll be getting anymore letters.
So my take on it is if the IRS gets wrong or missing numbers, they’ll issue a form letter, but I don’t think they’ll follow up.
Now, for regular contractors and service people for my rental business, they come in two varieties. They either come, take the check or credit card, issue their invoices, and in many cases, includes a sales tax, and I pay him.
The other type comes, tell me the cash price is, lets say $100.00, but by check with a receipt is $125.00, and add in the sales tax. So the price of a job can run $100, cash, to about $135.00 with the 8.875% sales tax here in NYC.
So if I were to agree to pay cash, I would not go out of my way to 1099 the contractor, to get him into trouble. Usually, when I pay by check, get a receipt, the contractor is an “S Corp” anyway, so there is no need for me to issue one.
The problem with these contractors won’t come mainly from the IRS, but from the local authorities as they didn’t file the correct sales tax. In NYC, there is another one called an “unincorporated income tax”, and one friend of mine, who dutifully reported and paid the Fed and State taxes, was unaware of this one, and didn’t pay it.
As to issuing the 1099’s, I recall I have to do it in Jan, and for my employer, my books are closed on or around 12-31, so this year I issued my 1099’s and W-2’s on Jan 4. For my rental business though, I don’t get started to do the books till Feb, and usually, I file for an extension in Apr. No reason I can’t have it done on 12-31 like for my employer, but that’s how it usually happens.
So if I were to issue 1099’s for my rental business, I would have to work on an entirely different schedule altogether. Currently, I’m in no shape to issue it on time.
Re: Contractors & 1099s - Posted by Tracy
Posted by Tracy on January 28, 2011 at 09:41:35:
We are an LLC that owns about 10-12 rental properties now. We were under the assumption that we had to 1099 anyone that did work for us on the properties. Is this incorrect?
Re: Contractors & 1099s - Posted by Natalie-VA
Posted by Natalie-VA on January 30, 2011 at 14:06:33:
Hi Frank,
Good to see you. We’ll have to agree to disagree on this one. I believe that you are incorrect in only 1009ing your vendors for labor costs. I also believe that your client correctly 1099ed you for all payments to you. It’s not too complicated for you to expense your cost of the computer equipment. On the other hand, since you were a s-corp, they shouldn’t have 1099ed you at all. I agree with that part.
Hope all is well and you’re shoveling out okay, again. 
–Natalie
1099 Changes for after 12-31-2011 - Posted by Frank Chin
Posted by Frank Chin on January 29, 2011 at 07:52:59:
To add to what I said, there are upcoming changes to 1099 reporting, that would take effect after 12-31-2011 based on a provision of the new Health care law, commonly referred to as “Obamacare”. My gut feeling is it’ll probably be repealed to a great extent this year.
The provision is within Tax code section 6041 dealing with 1099 reporting.
This link details it:
Just to add … - Posted by Frank Chin
Posted by Frank Chin on January 28, 2011 at 17:57:09:
Tracy:
If you intend to use a contractor, and then issue this contractor a 1099 later on, at the time of the first hire, or the next payment, have him complete the form W-9 for your files. The link to the form is:
Tell them you need this for your file, and if the contractor balks, then you know he does not want a 1099.
As I said, we don’t request this of corporate entities. And if you hire an illegal alien, chances are he or she doesn’t have a SS# or EIN# either.
I have W-9’s on file for my contractors.
Re: Contractors & 1099s - Posted by Frank Chin
Posted by Frank Chin on January 28, 2011 at 10:12:34:
Tracy:
I issue the 1099’s for the non-profit where I handle the finances, and the rule we followed is we issue them to “proprietorships” or “partnerships” over $600/annually, but not to corp. entities.
So we issue quite a few 1099’s at my employer as most of the performers we pay are individuals, not corp entities. But if the contractor is organized as a Corp., then there is no need to issue the 1099’s.
If it is an LLC, then you would have to determine if the entity had elected to file as a “Corp.” not as a proprietor or partnership.
Simply put, we just issue 1099’s to people whom we pay as individuals, but NOT to those organized as corps or LLC’s.
However, when I issue 1099’s to dance instructors for their performance, I do not include in it, as an example, such as payments for uniforms they resell to us for our members, as it is for sale of goods, NOT compensation.
So, as I was telling you in the earlier post, a client of mine indiscriminantly issue 1099’s to all contractors, for everything, not taking into consideration what the payments are for, and what type of corp entity they are dealing with.
And because most if not all of the legitimate contractors I deal with in the rental business are “S Corps”, I do not issue 1099’s in the rental business.
Re: Contractors & 1099s - Posted by Frank Chin
Posted by Frank Chin on January 31, 2011 at 01:45:32:
Hi Natalie:
Good talking to you again. Out of curiosity, I took a look at IRS code section 6041.
I had some discussions with CPA’s in the past about this, and they go into the type of payments that should go onto 1099’s, and the interpretation of it is it applies to compensation, that is the purchase of services, but not to purchase of goods.
I can’t figure out from the wording of the code that I have to include purchases.
For instance, I patronize my local hardware store, for nearly 20 years since I moved here to buy supplies for my rental business. Lately, I bought stuff like snow melt, shovels in view of the heavy storms. I see the sign over the store, and never asked him if he is a proprietorship, LLC or S Corp.
I clearly make over a thousand dollars in purchases every year, and never thought of bringing by a W-9, and make the guy sign it.
Now if it was only supplies, you might think I’m really of my rocker. Then occasionally, I bring window screens to him for repair, and he does other repair services as well, including lock smithing.Clearly, this should be 1099 if he is a not a corp, but I don’t know this, if he is or not.
Based on what you and JT said, if I can’t figure out what corp entity he is, and if “some work” involves labor, I would have to 1099 the guy for everything I buy from him each and every year, and let him and the IRS figure it out.
I haven’t gotten up the nerve to bring a W-9 for the hardware store owner to complete, and I wonder how many “real estate investors” bring W-9’s to their local hardware store. Now, I do quite a bit of business down at “Home Depot” too, and I wonder what they would say if I march down there with a W-9 in hand as I don’t know if they are an LLC filing as a corp.
Of course I’m musing about all of this in fun now, but if you look at the upcoming changes to section 6041 of the tax code under Obamacare, I might have to do it, that is drop off a W-9 down at Home Depot, as 1099’s applies to all corp entities and beyond compensation.