Beginning with payments made in 2020, non-employee compensation paid to independent contractors must be reported on Form 1099-NEC, Nonemployee Compensation, rather than in box 7 of Form 1099-MISC. The reason for the switch is the general due date for filing Form 1099-MISC is March 31. The Path Act of 2015 requires businesses to file information returns about any non-employee compensation by January 31 of each year. Thus, the new Form 1099-NEC will be used for non-employee compensation with a filing deadline of January 31, while Form 1099-MISC will continue to be used for other miscellaneous payments with a filing deadline of March 31.
If you receive rental income, the law requires you to report total payments of $600 or more in a year to a vendor for services (such as, plumbing, lawn maintenance, rental management, accounting, etc.).
Currently, there are several exceptions to the reporting requirement:
- payments to corporations
- payments made using debit or credit cards
- payments to multiple vendors when the total amount to any single vendor is less than $600; and
- non-deductible payments made in connection with your personal-use property.
If you think the reporting requirements may apply to you, we recommend that you begin gathering the required information before making any payments to vendors.
Accordingly, we have outlined a step-by-step process for you to consider:
- Obtain your own Employer Identification Number (EIN) to report on a Form 1099-NEC, Miscellaneous Income. Although an EIN is not required by the Internal Revenue Service (IRS), we strongly recommend that to reduce identify theft risk you use an EIN as opposed to your Social Security Number (SSN). You can go to IRS.gov and apply online for an EIN. On the website, click on "Apply for an EIN Online," then scroll to the bottom of the page and click on "Apply Online Now." You will then click "Begin Application." Follow the steps on the website to requiest an EIN and make certain that you print the page indicating your EIN when it is provided to you. If you have any questions, please call us to walk you through the process. (The link for the application is https://sa1.www4.irs.gov/modiein/individual/index.jsp.)
- If your rental property is already in an entity such as a limited liability company (LLC) that has its own EIN, you do not need to obtain another one. Also, you do not need to obtain a separate EIN if you already have one for a business you own as a sole proprietor. However, you will need to obtain a new EIN, even if you already have one, if the other business you own is a disregarded limited liability company, partnership, or corporation.
- Obtain information from the vendor. We recommend that you begin to collect the relevant information on vendors as soon as possible. Each vendor should complete a copy of W-9, Request for Taxpayer Identification Number and Certification, to provide you with its:
- EIN or Social Security Number
- Type of Business (sole proprietor, partnership, corporation, etc.)
- The vendor must also certify that information provided is accurate, they are not subject to backup withholding and they are a U.S. citizen (or other eligible U.S. person).
- We recommend that you obtain the required information before you send any payment to a vendor. Note that the "vendor" is the business to whom you issue payment. If you are issuing a check or paying cash to an entity, the Form W-9 should report the entity's information. If an employee renders the service but you issue payment to the employer, you do not need any personal information from the employee. However, many times sole proprietors render services personally and can sign the form.
- Keep detailed accounting records during the year. In order to track which vendors you paid $600 or more to during the year, you will need to keep more detailed records than in prior years. For example, you will need to record how much of a payment to a vendor is related to services as opposed to the purchase of goods. In addition, you should only note the amount paid to a service provider in connection with the rental activity (i.e., you should exclude any payment or portion of a payment made in connection with your personal-use property, such as your personal residence).
- Submit Form 1099 before it is due. A separate Form 1099-NEC will be required for each vendor. Generally, you need to provide "Copy B" of the Form 1099-NEC to the vendor by January 31 and file "Copy A" with the IRS by February 28 of year following payment. Unlike most tax forms which you can download from the IRS website and use, Form 1099-NEC must be obtained in hard copy from the IRS to file as it is a special type of scannable form. We recommend that you contact us in early January so we can assist you with the filing procedures and instructions.
If you have any questions regarding your reporting requirements or any other matter, please call us.