If you use unincorporated independent contractors to perform services for your rental and you pay them $600 or more for the year, you are required to issue them a Form 1099 after the end of the year. This will help you avoid two things, facing the loss of the deduction for their labor and expenses and a monetary penalty. Issuing 1099s is a new requirement for landlords, beginning in 2011, so if you own rental property be aware that you should be collecting W-9s from your pool service person, handyman, gardener, management company and other unincorporated service providers.
IRS Form W-9, “Request for Taxpayer Identification Number and Certification” is provided by the government as a means for you to obtain the data required (legal name, tax ID number, address) from your vendors in order to file the 1099s. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor or independent contractor complete the Form W-9 prior to engaging in business with him or her.
Many landlords overlook this requirement during the year, and when the end of the year arrives and it is time to issue 1099s to contractors, they realize that the required documentation has not been collected. Often it is difficult to acquire the contractor’s information after the fact, especially from those contractors with no intention of reporting the income.
For example, you have a repairman out early in the year, pay him less than $600, and then use his services again. As a result, the total you end up paying him for the year exceeds the $600 limit. You realize you overlooked getting the information needed to file the 1099s for the year and will have to spend your valuable time contacting the repairman to obtain the information. Therefore, it is good practice to always have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services. Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts.
Update – President Obama signed into law H.R. 4, the Small Business Paperwork Elimination Act, which repeals the 1099 tax-reporting requirement established in the health care overhaul law that passed last year. The provision would have gone into effect in 2012.