Paying the Handyman? The IRS Wants to Know

Article by John Compagno,

If you're the owner of even just a single unit of rental property, starting in 2011 you must begin tracking any vendor doing at least $600 worth of work for you, because you now have to send them an IRS 1099 Form for the 2011 tax year – or face stiff penalties.

The requirement to track vendors and issue the 1099 forms isn't new. It's something larger rental property owners already do. But last year, when the federal government enacted the Small Business Jobs and Credit Act of 2010 (H.R. 5297), it expanded the requirement to all property owners, no matter how small. In effect, even property owners just doing rental as a sideline – maybe as part of a family investment fund or as part of a retirement savings plan – are "conducting a trade or business," so the 1099 reporting requirement now applies to them.

That means you have a legal obligation to obtain certain information from your vendors (generally, their name, address and Social Security number or other Tax ID, plus the amount you pay them over the year), and then issue them the 1099 forms to reflect the income you paid them for the year. (Don't forget to keep a copy for yourself.) Since the requirement takes effect for the 2011 tax year, you should start tracking the payments you make to your vendors beginning in January 2011. After you've tracked your payments for the year, you'll send them the total in the 1099 form in early 2012.

There are some exceptions to the requirement:

• Burden: if gathering the information and issuing the forms would create a hardship

• Duration: if the property is only a temporary rental of your own residence

• Income: if your income from the rental doesn't meet minimal threshold requirements

Additional Guidance to Come

More guidance is forthcoming. The IRS will fill in the details on what constitutes a hardship or is considered "minimal" income, so you'll need to watch for that when it comes out.

On the vendor side, the requirement applies to all independent contractors or freelance workers that typically provide services in a rental real estate context. These include plumbers, electricians, painters, cleaning services, gardeners, landscapers, accountants and handymen – in short, virtually all service providers to the property that don't receive a W-2 form from you and who provide at least $600 in services for the year. It's a cumulative amount, so even if that painting job only costs you $400, you need to track it and add any other charges from that vendor to see if the total comes to more than $600, which triggers the requirement for sending that vendor the 1099 form.

How to Comply

To satisfy the requirement, you'll want to review your bookkeeping procedures (with your accountant if you work with one) to be confident you have a system in place to track your payments to your vendors. You'll want to set up your tracking procedure so that you can keep separate how you paid them: by credit card, debit card, check or cash.

The IRS will set forth the important dates for the 2011 tax year. You'll want to note those and be sure to comply, because late filing will be penalized. Indeed, penalties have been doubled under the new law.

The initial first-tier penalty has been increased from $15 to $30 (filing 1099 up to 30 days late), the second-tier penalty increased from $30 to $60 (more than 30 days late), and the third-tier penalty increased from $50 to $100 (filing after August 1). There's also a $250 penalty for the intentional failure to file.
As a general matter, you'll be able to request a 30-day extension for getting your forms to the IRS, but that won't apply to your deadline for getting the form to your vendors. Remember, they need to use those in preparing their tax returns.
For many owners, the new reporting requirement will come as a surprise. If you manage property for a small owner, make sure you let them know about it. If you're the owner, be sure to prepare to comply, which means tracking your payments starting this year.

A version of this article will be published in the January 2011 issue of REALTOR® magazine.

The Author is with the offices of Holland and Knight, San Francisco