Rental Owners Need to Prepare for the New 2011 Reporting Requirement

If you are a rental owner and during 2011 make payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income, the 2010 Small Business Jobs Act says that you are required to provide an information return (typically Form 1099-MISC) to IRS and to the service provider. In order to do that, you must obtain the payee's name, SSN and contact information before making payment. The IRS provides Form W-9 for that purpose.

There is a "Catch-22" you need to watch out for. Suppose you call a plumber and pay him $400 for a service call at your rental property and don't bother to have him complete and sign a W-9 since the amount is under $600. Later in the year, you need him again and pay him another $400 for the second service call at the rental. Again, you fail to obtain the completed W-9. Now you have a 1099 filing requirement but do not have the information you need to file the information returns in 2012. If the plumber can't be found, then you are left holding the bag. The moral of this story is to always collect a completed W-9 from the payee before paying him!

What happens if you don't meet your filing obligation? Well, there are monetary penalties! And as part of the 2010 Small Business Act, the penalties were doubled for information returns required to be filed after 2010. So if you are 30 days late filing the information return with the IRS or furnishing a copy to the payee, you are subject to a $30 per payee penalty. If the returns are more than 30 days late but filed by August 1, the penalty per payee is $60; if filed after August 1, the penalty jumps to $100 per payee.

The penalties can be substantial and you are cautioned to establish a procedure for obtaining W-9s from your service providers before the beginning of 2011. Note: Payments to incorporated businesses and those made for the purchase of merchandise are not included in these requirements until 2012.

When filing 1099s, your SSN or an Employee ID Number (EIN) must be included on the form provided to each payee. It may be in your best interest to file for an EIN so that individuals who are issued 1099s don't end up with your SSN.

Please call our office if you need assistance.