Sending 1099-NEC forms for a Rental Property

Many rental property owners are completely unaware that there are situations when they need to be filing a tax form to contractor who have done work on their rental property.   But they really should be aware of this requirement because if you don’t file the forms in situations where they are required, and you are eventually audited, you could pay substantial penalties for not having filed the required forms.

If you pay a contractor to do more than $600 of work for your rental properties or other businesses during the year, you may be required to file and submit a form 1099-NEC to both the contractor and the IRS. 

If a business that is required to file the form doesn’t file it, the penalty currently ranges from $50 to $280 per form, depending on how late you eventually file it. The penalty can even go up to more than double that amount if the IRS determines that you intentionally disregarded the requirement to file the form.  So it’s a very good idea to know if it’s required in your situation.

Whether this applies to you, depends on the specifics of your rental property business, and specific details about the payments. Even many tax professionals are uncertain about the specific requirements and whether they apply to rental properties.

Do I need to file the 1099-NEC for my rental property?

Not all rental property owners need to file 1099s.  But you do have that requirement if rental activities rise to the level of being considered a trade or business.  And that is the case if you meet any of the following criteria:

• If you have Real Estate Professional Status (REPS).  This doesn’t apply to most landlords, even if you are very actively involved in managing the rental.  It most often just applies to people who work in real estate (such as a real estate agent), in addition to owning and actively managing rental properties.
• If you file your rental income on Schedule C because it qualifies as a business because you offer “substantial services”.  This is also uncommon. That would be if you’re providing services to tenants during their stay, such as daily cleaning or meals.
• If your rental income qualifies for the QBI 199a deduction.  This is much more common than the other two criteria. If you are actively involved in your rental properties and you spend more than 250 hours per year managing them, you likely qualify for the 199a deduction, which means you also have to report payments with 1099s.

If you meet any of those criteria, then your rental income would be considered a trade or business, and in that case you do have the requirement to file 1099 forms.

In what situations do I need to file the form?

You have to file a 1099-NEC if all of these things are true:

• They did work on your rental which is considered a trade or business (as described above).
• You paid them $600 or more in total for the year.
• They are not a corporation. Generally, a company that has “Inc.” or “Corp.” as part of their name is an indication that they are a corporation.  Note that a corporation is not the same thing as an LLC. An LLC may or may not be registered as a corporation.  If it’s an LLC, you’ll need to ask them if they are a corporation (which would mean they are registered with the IRS as a C or S corporation). If there is any doubt, it’s a good idea to go ahead and request a W-9 form from them (more info on that below).  That form will have a checkbox in section 3 where they will indicate whether they are registered as a C or S corporation or not, and you should keep that form for your records. Payments for legal services (lawyers) still have to be reported, even if it’s to a corporation.
• It was for a service (not just a product you purchased). But when someone performs a service for you, you have to report the total they charged you, which may include parts and materials.
• They are a US citizen. You don’t have to file for payments to a non-US citizen living in another country. If they are a nonresident alien (someone who is from a foreign country and not a US resident, but they are living in the US), then you have to file form 1042-S instead.

There is an exception for transactions through a third-party network when that third party network does their own reporting for business transactions. For example, credit card payments don’t have to be reported. Here is a list of some types of payments and whether you need to report the payments on a 1099-NEC form:

• Cash: You must report it.
• Check / money order / cashier’s check / ACH: You must report it.
• Credit card / debit card payments: You don’t need to report it.
• Venmo: You need to report payments to personal accounts if you don’t select the “turn on for purchases” option. You don’t need to report payments to Venmo business accounts. You can tell if it’s a business account because if you search for their name it will show up under “businesses” rather than “people”. Also on the payment screen it will say “Eligible items covered by Purchase Protection”.
• PayPal: You need to report payments made to personal accounts if you used the “friends and family” option, but not if you used the “goods and services” option. Payments to business accounts don’t have to be reported. If it’s a business, it will say “Goods and Services” on the payments screen in the app.
• Cash App: You must report it unless the payment was sent to a Business account.
• Zelle: You must report it.

So examples of situations where you would have to report the payment would be things like if you paid a cleaner, handyman, etc. by check, and they aren’t a corporation.

If you paid someone using multiple payment methods throughout the year, only report the amount of payments that you made using a payment method that has to be reported. So if you paid someone with a credit card, and later paid them with Zelle, you only have to report the Zelle payment amount and not the credit card payment amount.

How to Obtain Payees’ Taxpayer Identification Numbers

The first step is to request the necessary information from the contractor to complete the form. You’ll need the contractor’s name or business name, SSN or EIN number, and their mailing address.  This information is generally given to you on a W-9 form. So you can simply ask the contractor for their W-9 form and experienced contractors will have one available. If you’re dealing with a contractor who is less experienced, you may want to get a W-9 form from the IRS website and print it out to give to the contractor to have them complete it. 

You should always require that they give you the W-9 form before you give them payment for their services. Once you’ve paid them for the services, it’s often much more difficult to convince a contractor to go through the trouble of getting a W-9 form for you.

If a contractor you are paying refuses to give you their taxpayer identification number, you are required to withhold 24% of their payment and subject that withholding amount to the IRS using Form 945, Annual Return of Withheld Federal Income Tax. If you already paid them, you should make at least 3 documented attempts to request their taxpayer identification number. If they still don’t supply it, you could potentially still be charged a penalty, so for future payments be sure to obtain their tax info first before paying them.

How to File 1099-NEC Forms

And then by January 31st of the following year, you’ll need to submit a 1099-NEC form to both the contractor and to the IRS.  If you have a tax preparer that you use, you may want to contact them to submit the forms, but you can also do it yourself.  

One option is to go to the IRS website and download and print the form and paper mail it.  But starting with forms filed in 2024, the IRS is Requiring that anyone filing 10 or more of these types of information forms must e-file the forms with the IRS rather than mailing paper copies.  So now more than ever it really makes sense to not just fill out paper copies of the form but go ahead and use a service to prepare and send the forms for you. 

The website Track1099 is probably the most popular option to do that, and their prices per form are very reasonable.  A new option that may be worth trying is TaxBandits.com.

Update: The IRS now offers a free 1099 e-filing service at https://www.irs.gov/filing/e-file-forms-1099-with-iris. But if you use that option, you’ll still need to mail or email a copy of the generated forms to the contractors that did work for you. If you would rather use a service that sends those forms for you, then you still might want to use a paid service like Tax Bandits or Track1099 instead.

So even if you haven’t done it in the past, it’s a good idea to start getting W-9 forms from contractors that do work from you this year. And then set a reminder on your calendar for January of next year to send out 1099s to contractors that you have paid $600 or more during the year.  

Keep on reading for more real estate tax information, or contact us if you would like a free consultation to talk about your tax situation.

FAQ

Do I need to send 1099s for payments made before a rental property is placed in service (available to rent)? There’s been some debate about this question among tax professionals, and it’s possibly a gray area. You may not have a requirement to report payments made before the rental is in service, but the safe choice would be to go ahead and report it.

Should the 1099 amount include payment for reimbursement for supplies? If your pay to someone includes materials or supplies, you should still include the whole amount you paid them. When they do their taxes, they’ll deduct supplies they bought as an expense.