Q: I own a rental property. I pay $200 per month to a gardener. Am I required to report these payments to the IRS?
A: A self-employed service provider such as a gardener, plumber or accountant you hire to perform services for your rental activity is an independent contractor for tax purposes — and not your employee.
As such, your tax responsibilities toward him or her are modest. The general rule is that whenever you pay an unincorporated independent contractor $600 or more during the year for business-related services, you must:
- File Internal Revenue Service Form 1099-MISC reporting how much you paid the workers; and
- Obtain the workers’ taxpayer ID number.
The IRS imposes these requirements because it is very concerned that many independent contractors don’t report all the income they earn. To help prevent this, the IRS wants to find out how much you pay independent contractors and make sure it has their correct tax ID numbers.
Until this year, however, many landlords were exempt from this reporting requirement. Only landlords whose rental activities qualified as a business were required to file Form 1099s with the IRS. Landlords who were only investors were not required to comply with these reporting requirements.
A landlord is an investor for tax purposes if he or she does not regularly, continuously and systematically work at landlording. An absentee landlord who owns a few rental units entirely managed by a management company would probably be classified as an investor.
However, the law has changed. Subject to some important exceptions noted below, starting in 2011 all landlords must comply with the 1099 reporting rules, even those who are investors for other tax purposes.
So, if you haven’t filed 1099s in the past, you may have to start doing so for independent contractors you hire for rental-related work in 2011 and later.
But there are some exceptions to this new rule. The following groups of landlords who are investors need not file 1099s:
- Landlords who obtain substantially all of their rental income from renting their principal residence on a temporary basis;
- Landlords whose annual rental income is less than a minimum amount to be established by the Internal Revenue Service; and
- Other investor-landlords for whom complying with the reporting requirements would cause hardship — the IRS will adopt regulations providing guidelines on what constitutes a hardship.
The IRS has yet to adopt detailed regulations implementing these exceptions, so we don’t know yet exactly who will benefit from them.
In addition, Form 1099 need not be filed when you hire an incorporated independent contractor. But this rule is scheduled to change in 2012.
Form 1099-MISCs reporting payments made in 2011 don’t have to be filed with the IRS until Feb. 29, 2012. However, you need to keep track of your payments to independent contractors during 2011 so you can report them properly in 2012.
Be sure to obtain the name, address and taxpayer identification number of any person providing services for your rental activity. Have the worker complete and sign IRS Form W-9, Request for Taxpayer Identification Number and Certification — prior to paying him. You don’t have to file the W-9 with the IRS, just keep it in your files.
Starting in 2012, you’ll have to file a Form 1099-MISC for each unincorporated service provider who performed services for your rental activity and who was paid more than $600 during the year (all payments made over the entire year are added together for purposes of the reporting threshold).
Copies of the form must be sent to the IRS, your state tax agency and the worker. The filing deadline is the end of February.
Be aware that the IRS can impose monetary penalties on landlords who fail to comply with the reporting requirements. The penalty is $250 for each 1099 you intentionally fail to file. The penalty is less if the failure is not intentional, ranging from $30 to $100, depending on how quickly you fix the error by filing the 1099.
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.