As tax time rolls around you may be wondering if you’ll be receiving a 1099-MISC form from your tenant for your rental income. And that depends on a few things including who paid you and how much you received.
Before the next tax season rolls around, first we’ll need to discuss the basics of when a Form 1099-MISC is required, regardless of what industry you operate in. Because not all transactions and businesses are treated the same.
Then, we’ll move into the specifics of reporting requirements and when a 1099-MISC is required for rental income.
And we’ll wrap up with some comprehensive examples.
Form 1099-MISC basics
To remove some of the confusion and mystery around when you will or won’t receive a 1099-MISC for your income tax, there are three criteria to consider.
Those three criteria are:
- How much you were paid,
- The tax classification of your business, and
- If your customer was operating a business.
Remember, these criteria apply to all types of business, not just rental properties.
Form 1099-MISC is considered an information return that is required by the Internal Revenue Service (IRS) to track income that may not be reported on a taxpayer's tax return.
The how of 1099-MISC
The first criterion to consider is how much you received from your client for services you completed as an independent contractor. This is an important distinction. If you sold merchandise or products to a customer, no 1099-MISC is necessary for those sales. But if you sold products and provided services, then the amount related to your service needs to be considered for a 1099-MISC.
For example, if you’re a computer consultant and you sold $2,000 of software to your client and also provided training and set-up procedures for $1,500 for the new software, only the $1,500 is considered for 1099-MISC purposes.
And next, if you received more than $600 in a tax year from a client, this will be the first trigger that you may need to receive a 1099-MISC.
The who of 1099-MISC
Next, after you look at the dollar amount and the purpose of the payments, you’ll need to consider your business’s tax classification.
Generally, the tax classification is the same as the legal structure. However, there are exceptions where an entity can have a tax classification different from its legal structure. The most common of these exceptions is the limited liability company (LLC) electing to be taxed as an S-Corporation. Remember that even if you are an LLC, you can elect to be taxed as an S-Corporation by filing Forms 2553 and 8832.
So who needs to receive a 1099-MISC if they receive more than $600 for services? Sole proprietors, partnerships, and limited liability companies do.
S-corporations or LLCs entities electing to taxed as a corporation, do not.
How will your customer know your tax classification? When you complete Form W-9 and give it to your client or customer, you’ll check a box on line 3 to indicate your tax classification.
It’s always good practice to send a Form W-9 to all your clients when you send your first invoice because some clients will forget to ask for this additional information. The Form W-9 includes your name, address, and employer identification number (or social security number if you're operating as a sole proprietor).
The when of 1099-MISC
The last criterion to consider whether you’ll receive a 1099-MISC is whether the service was completed during the course of business.
A 1099-MISC is only required for activity that happens in the ordinary course of operating a trade or business. Personal payments are not required to be reported.
Whether a transaction happens in the course of business must be viewed from the point of view of the payor, not the payee.
For example, if you paid a plumber $3,000 to replace the hot water heater in your home, you aren’t required to send the company a 1099-MISC. This is an example of a personal payment.
However, if the new water heater was for your office building and the building is owned by your business, then a 1099-MISC would be necessary for the portion of the $3,000 that relates to the service (e.g. labor).
In conclusion, if your business receives more than $600 in a tax year for services in the ordinary course of business and is taxed as a sole proprietor, partnership, or LLC, a 1099-MISC will be required.
Now that we know the background criteria on when 1099-MISC are required, let’s look at the specifics of rental real estate.
Form 1099-MISC and rental income
Who issues the 1099-MISC hinges on whether rent payments are made directly to the property owner or to another party like a property manager or real estate agent.
If rent is paid directly to the owner, the tenant is required to report it on a 1099-MISC if it meets the three criteria from above (e.g. more than $600, in the ordinary course of business, and your tax classification is sole proprietor, partnership, or LLC).
If the rent is paid to a property management company or real estate agent, the tenant is not required to send a 1099-MISC. Instead, the manager or agent is required to send the 1099-MISC to the property owner.
When will you receive a Form 1099-MISC?
The IRS requires all Form 1099s to be sent to the taxpayer by January 31 for the previous calendar year. This the deadline for when the forms need to be mailed. So you might receive yours at the start of February if it was mailed on January 31. Here's what to do if you don't receive a 1099.
Examples of rental income and Form 1099-MISC
You’re a property owner who rents a home to a family for $15,000 a year. Will you receive a 1099-MISC?
No. Although you received more than $600, this fails the course of business test. Renting to a family qualifies as personal payments that are not reportable.
You own a home and rent out a bedroom on Airbnb. You earned $5,000 last year. Will you receive a 1099-MISC from Airbnb?
In this case, you likely won’t receive any tax form from Airbnb because Airbnb operates as a credit card and third party transactor. Although you received “rent”, the criteria Airbnb will use is based upon $20,000 in transactions and 200 or more reservations.
You’re a property owner with a business that is taxed as an S-Corporation. You rent office space to an attorney for $18,000 in 2020. Will you receive a 1099-MISC?
No. Although you received more than $600 in rent and it was in the course of business, your tax classification of an S-Corporation means you’re not required to receive a 1099-MISC.
Same as example 3, but instead of being taxed as an S-Corporation, you’re taxed as a limited liability company.
Yes, you will receive a 1099-MISC since you received more than $600 in the course of business and your tax classification is an LLC.
Same as example 4 but the tenant pays rent to your property manager, not directly to you.
Yes, you’ll receive a 1099-MISC but it will come from your property manager, not your tenant. Remember one of the exceptions for rent and 1099-MISC is if the rent is paid to a property manager in the course of business, the tenant doesn’t need to provide the 1099-MISC. It’s the property manager’s responsibility.
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