It's that time of year again! And we're not talking about Christmas or New Years... Something far less exciting, but a necessary part of the property management industry. It’s 1099 season! Every year as the January 31st deadline approaches, we get dozens of emails and calls from panicked clients with the same concerns: how do I file 1099s for my property management company, who do I include, and how do I know my numbers are correct?
Well, this year we’ve decided to get ahead of the chaos and provide some basic tips, tricks, and best practices for getting your 1099s filed with speed and confidence so that you can move forward during Q1 and take care of things that actually generate your company revenue.
The IRS has amended their eFiling requirements for 2023 1099 Tax Returns. Previously, you were required to eFile if you had 250+ recipients. This has been reduced to 10 recipients. Which applies to the vast majority of the Property Management industry. Follow the instructions HERE to apply for a TCC so you can file online before November 27th, 2023.
A 1099 form is essentially a record for the IRS that your company paid a person or entity a certain amount in a given tax year. There are different versions of 1099s and a lot of requirements and exemptions, but for the purposes of property management, we’re going to focus primarily on two categories - rent income for Owners, and payments to certain Vendors.
Rent goes on a 1099-MISC under “Box 1”, which is literally called “Rents”, in case there was any confusion. Payments to Vendors, also known as “non-employee compensation” or NEC, used to fall under “Box 7” on the same form but starting in tax year 2020 it actually goes on a separate form altogether called a 1099-NEC. In either case, you are NOT required to send the form or include them in the filing if the total for the individual or entity over the course of the tax year is less than $600. Still following? Great. We’ll get through this together.
For the 1099-NEC, you are generally not required to send a 1099 if the recipient is not a service provider. So no, you don’t need to send a 1099 to every hardware store you purchased materials from - it’s only for services performed by a person or entity that is not an employee. Generally speaking all retail stores, restaurants, gas stations, and government entities are exempt. Amounts you pay via credit card directly through a Vendor’s own merchant processor account are also exempt from 1099s.
Although retailers are exempt, keep in mind if the Vendor is eligible the total should include everything paid out directly to the entity, which may include materials. If there were reimbursements throughout the year, the 1099 recipient should track those expenses and write them off on their own return so ultimately they don’t get taxed on that portion of the compensation. With in-house hourly 1099 maintenance labor this can be tricky, so be sure your Vendors understand this crucial point. If they are not a W-2 employee, then they are an independent contractor and it’s not your responsibility to track their expenses!
Ok, so the 1099-NEC is only for service providers for whom you paid more than $600 total over the tax year. But what about the entity type?
Generally speaking you don’t need to send a 1099 if the entity is a registered corporation OR (and here’s the kicker) “elects” with the IRS to file their taxes as such. So how are you supposed to know how they’ve elected to be taxed by the IRS? That’s where form W-9 comes in!
The W-9 is a simple form that serves as a formal request for the tax status of the recipient. It is readily available online, is for your own records, and generally doesn’t get sent to the IRS. You could technically get all of the information required without using the IRS form itself, but the standardized format makes gathering the data simpler, plus it has all the directions and information on the form so the recipient has no excuse for not filling one out correctly.
A completed and signed W-9 is a great way to cover your butt if you later find out the information they provided was wrong. You’ll get a scary sounding letter from the IRS, but it’s no big deal cause you did your part! Just get the corrected info from the Vendor or Owner before you pay them out and typically no other action will be required.
Many of our clients require a completed W-9 as a prerequisite for new owners and service vendors to do business with them. It’s technically what the IRS requires (you’re even supposed to start withholding any money you owe them until you get it) and if they can’t provide this basic information, it’s a pretty big red flag.
Even Vendors who may not necessarily be “immigration compliant” (expired green card, visa, etc) and may not qualify as a legal W-2 payroll employee should still have a tax ID number they can provide you for 1099s. When it comes to independent contractors, as long as you get this information and file 1099s as best you can, you’ve done your part.
If you’re not collecting a form W-9 from every single service vendor and rental owner you work with, then you should start ASAP. The longer you wait, the harder it will be to file and send accurate 1099s when the deadline hits.
So let’s say you get that completed W-9. We’ve already discussed that corporations are exempt, but we frequently hear folks misuse the word “corporation” to include single-member LLCs, not include LLCs with special tax elections, and other misunderstandings. To clarify, we’ve created this simple cheat sheet you can use:
While property managers are exempt from receiving 1099s for rental income received (even from a tenant renting a commercial space), the PM company itself is required to send a 1099-MISC for all rental income received on behalf of property Owners. This means if you are a property manager, you should have a W-9 on file for every US-based property Owner you’re contracted with. Even if they are exempt, such as with corporations or self-directed IRAs, the W-9 is your proof that is actually the case.
If they are a non-resident and do not have a social security number nor do they own the property through a US registered entity, then the IRS requires you to get a Form W-8ECI instead of W-9 and file a 1042-S with the IRS instead of a 1099-MISC. The details of tax filings for foreign real estate investors are beyond the scope of this article, but be aware that generally speaking they are required to file a US return and pay taxes on that income just like anyone else. As far as we know, no PM software has built-in functionality to prepare or file a 1042-S so be sure to do your research and check with your CPA on best practices!
When it comes to rental Owners, all money collected on their behalf will generally fall into two boxes on the 1099-MISC: Box 1 for rents and Box 3 for all other income. Keep in mind this is gross income we’re talking about, before any deductible expenses. So unlike the 1099-NEC for Vendors, it doesn’t matter how much you actually pay out to Owners in distributions.
All revenue collected on a property Owner's behalf should be reflected on their 1099-MISC. Their CPA can then subtract all deductible expenses reflected on the annual report you send them and combine it with the Owner’s own out-of-pocket expenses to calculate the final taxable net income from rental activity on each property.
If a property is owned entirely by a single LLC, partnership, or corporation, regardless of how many shareholders there are, all of the income and expenses apply 100% to that single entity. But what about when there are multiple entities that own a single property (also called “tenancy in common” or “joint tenancy”)? There are two general philosophies for reporting income and expenses in these situations. One being that you should report 100% to all parties since they’ll all write off 100% of the expenses as well. The final net income (or loss) is then adjusted on each Owner’s return based on the percentage of ownership.
However, a number of PM softwares (such as Buildium following a 2019 update) allow you to enter the percentage ownership and automatically adjusts the gross income reported on each Owner's 1099-MISC based on that percentage. This is becoming more and more common and is technically more accurate but it’s extremely important to understand that a CPA may not automatically know whether or not the 1099 and/or financial reports are adjusted based on percentage ownership. If an Owner doesn’t clearly communicate this information to their CPA, they could end up paying more in taxes on their rental income than necessary.
The key thing to understand here is that if you are going to split the income on the Owners 1099s, then the Owners should also split the expenses by the same percentage. Similarly, if both Owners get 1099s based on 100% of the annual income, then the CPA should not split the total expenses and instead split the final net total. While splitting of income for 1099’s is common, property expense reports are almost always consolidated. So this is an increasingly important piece to understand as software changes the way PMs report financials for their clients.
It’s also important to point out that if a property is owned by a married couple filing a joint return, then only one 1099 is necessary since they are technically the same taxpayer.
This one is a little trickier. The problem usually isn’t with rental Owners 1099s since all of that income gets tracked in one place (generally wherever the lease ledgers are tracked). The problem usually comes down to the same service vendors being paid from both systems in any given tax year. The best practice here really depends on the unique structure and software your business uses.
For example, in Buildium the totals for Vendor 1099-NECs can be manually adjusted, so you can just take the total paid from a company operating account in Quickbooks, and add it to the total paid from a trust account in Buildium, so the Vendor gets just one consolidated 1099-NEC. But in Appfolio 1099 totals can’t be adjusted, so for Appfolio users, it’s better to file only the rental Owner 1099-MISCs in Appfolio and add the 1099-NEC Vendor totals paid out of Appfolio to the 1099-NEC totals in Quickbooks and file from there instead.
At the end of the day, the important thing to understand is that a 1099 is an official statement of the total amount a specific entity has paid to another entity over the year. So no tax payer should ever get more than one 1099-NEC from any given entity for any given tax year. This means a property manager should never send the same Vendor two 1099s unless they were actually paid from two different entities.
We help hundreds of clients prepare their 1099s every tax season at APM Help for thousands of Vendors and Owners. No matter your situation, we are confident we can help. Schedule your complimentary consultation today!
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