Should I Use a 1099-MISC for Rental Property Repairs? – Video
What’s a 1099? It’s a form you have to submit showing that you paid a contractor or someone money.
What’s the specific rule? If it’s paid in the context of a business, so if you pay a kid to cut your personal lawn, no 1099. It’s not part of your business. You pay the same kid, the same amount to cut the lawn on a rental, 1099, it’s part of a business. A 1099, for someone who provided $600 or more in services during the year. For services, the IRS liens in favor of if it’s doubtful. Someone fixes your car, and they charge you an amount that included services and goods, the IRS will treat it as all services.
You’re in business, you’re paying $600 or more to someone for the year for services, and they’re not a C corporation, which you don’t always know if they’re C corporation. Here’s what you can do. If they’re really huge, assume they’re a corporation. For example, Lowe’s, Home Depot, they’re probably C corporations. You can assume that. That’s what that’s meant to get at. You pay someone for services, $600 or more in a year and it’s from a business, you have to 1099. That’s a fairly easy thing to do.
Here’s where the problem is. A guy did my driveway in Columbus Ohio. He was from Honduras and he was legal. No, I-L in front of it. I’m sorry, he was not an undocumented voter, whatever. He was legal. He hired a lot of illegals,which in construction is very normal. In Columbus, if you don’t hire illegals, you go out of business, because you can’t afford to compete. Everybody does it. Everybody is a lawbreaker and they nail you whenever they want.
This guy built the American dream. He built a concrete business, he did my driveway, for example, did great work. It’s the kind of immigrant we want. The guy came over, worked hard, paid his taxes. He, unlike most people, gets punished for doing a good deed. Most people don’t 1099 their Mexican contractors. You should, but they don’t. He 1099 these guys, but he used whatever social security number they gave him, which turns out, who knew, all of them were bogus.
That’s the same as not 1099ing, and because he got on the system as having the 1099. He tried to do the right thing. It was the wrong 1099, so the government said, the penalty for giving us the wrong social security or tax ID number is the same as not 1099ing. Sometimes it’s $300 per 1099, but they can also force you to pay the tax if the person you failed the 1099 didn’t pay, didn’t report. Here’s what happened. These Mexican subcontractors didn’t file tax returns.
We tracked down about half of them and got them to file the returns. By the way, every one of them got a refund. Every one of them, even though they paid no money into the system. Additional child tax credit, aka disguised welfare and kids down south in Mexico, do count. That is perfectly legal within the code. They all got refunds, but we couldn’t find about half of them. They were somewhere else.
Here’s what happens. If you don’t file a 1099, or you have the wrong tax ID number, the government can make you pay the amount that should have been on the 1099, so it’s the gross amount you pay them, not the net profit. The gross amount on the 1099, multiply that by 0.28, 28% withholding rate. Then for penalties, add about another 50% to the 28%. Roughly 42% of the gross amount.
He ended up owing about $350,000, he brought in about $50,000 a year. The IRS auditor was the Borg. She was utterly devoid of emotion or decency or common sense. I said you’re going to put them out of business. He works at a Wendy’s now, and she just looked at me and just repeated over and over. We want compliance, we want compliance, we want compliance. For those of you in favor of a large state, you got one.
What’s your guard? You have to get a W9 before you pay the contractor. Write that down. Get a W9 before you pay anybody because once you pay them your leverage is gone, the W9 means they’re swearing under penalties of perjury that the social security number or tax ID number’s correct. Even if it’s not correct, you will not be penalized until the IRS warns you.
In other words, January 1st to get a W9, you pay this guy through March 15th, you get a letter from the IRS April 1st, saying, hey, the social security number is bogus. You must, therefore, withhold on the 1099 payments to him, you have to give us 28%. Everything that happened before April 1, when you got the IRS letter, the W9 protects you. That’s your get out of jail free card and they’re starting to enforce it. They didn’t use to. They are, they’re looking for money. As you can imagine, the numbers in this case at stake can be massive. Get the W9. That’s how the IRS can force you to pay someone else’s taxes.