Most of the people landlords hire to help them are independent contractors (ICs) who offer their services to the general public. This is different from employees who work solely for one employer.
As far as taxes are concerned, hiring independent contractors is very simple. When you hire an independent contractor, you don’t have to withhold or pay any state or federal payroll taxes on the IC’s behalf. This is one of the great benefits of hiring ICs. In contrast, when you hire an employee you must withhold federal and state taxes and pay one-half of the worker’s Social Security and Medicare taxes out of your pocket.
However, there is one tax detail you will have to take care of when you hire an IC: If you pay an unincorporated IC $600 or more by cash, check, or direct deposit during the year for business-related services, you must:
The IRS imposes these requirements because it is very concerning that to avoid paying taxes, many ICs don’t report all the income they earn. To help prevent this, the IRS wants to find out how much you pay ICs you hire and make sure it has their correct tax ID numbers. (Learn more about tax deductions for landlords.)
You need to obtain an unincorporated IC’s taxpayer ID number and file a 1099 form with the IRS only if you pay the IC $600 or more during a year by cash, check, or direct deposit for rental-related services. It makes no difference whether the sum was one payment for a single job or a total of many small payments for multiple jobs.
There are some special rules to follow in calculating whether the payments made to an IC total $600 or more during a year:
If you pay an IC by an online payment service like PayPal, a credit card, or any other type of electronic payment, you don’t need to include the amount in the $600 annual reporting threshold. Instead, PayPal, the credit card company or the payment company you use is supposed to report the payments to the IRS by filing IRS Form 1099-K, Payment Card and Third Party Network Transactions. Copies of the form are sent by the processing company to the IC, the IRS, and the contractor’s state tax department. No copy is sent to you. However, Form 1099-K must be filed only if the payment company processes over $20,000 in gross payments to the contractor and the contractor had more than 200 transactions during the calendar year.
On the other hand, you must include payments you make for parts or materials the IC used in performing the services. For example, if you hire an electrician to rewire a rental building and he charges you separately for the electrical wiring and other materials he installs, the cost must be included in the tally.
You need only count payments you make to ICs for services they perform in the course of your rental activity. Don’t count payments for services you make to ICs for personal or household services or repairs—for example, payments to gardeners and housekeepers for your residence. Running your home is not a rental activity.
You can file Form 1099-MISC on paper or electronically (but, if you file more than 250 1099 forms each year, you must file electronically). All 1099-MISC forms must be filed with the IRS by January 31. The IC must also be provided a copy no later than January 31.
You can electronically file your 1099-MISC forms directly with the IRS by using its FIRE Production System. To do so, you must create an account and get permission from the IRS. For the details, visit the IRS Filing Information Returns Electronically (FIRE) webpage. Alternatively, there are inexpensive online services that will complete and electronically file the forms for you. Google "1099-MISC filing" to find these.
You must obtain original paper 1099-MISC forms from the IRS for filing. You cannot photocopy this form because it contains several pressure-sensitive copies. Each 1099-MISC form contains three parts and can be used for three different workers. All your 1099-MISC forms must be submitted together along with one copy of Form 1096, which is a transmittal form. You can order these forms through the IRS website. You can also generate paper 1099 forms by using property management software or accounting and tax software. You can also obtain 1099 forms from stationary stores and office supply companies.
Some ICs work in the underground economy—that is, they’re paid in cash and never pay any taxes or file tax returns. The IRS may not even know they exist. The IRS wants you to help it find these people by supplying the taxpayer ID numbers from all ICs who meet the requirements explained above.
If an IC won’t give you his or her number or the IRS informs you that the number the IC gave you is incorrect, the IRS assumes the person isn’t going to voluntarily pay taxes. So it requires you to withhold taxes from the compensation you pay the IC and remit them to the IRS. This is called backup withholding. If you fail to backup withhold, the IRS will impose an assessment against you equal to 24% of what you paid the IC.
Backup withholding can be a bookkeeping burden for you. Fortunately, it’s very easy to avoid. Have the IC fill out and sign IRS Form W-9, Request for Taxpayer Identification Number, and retain it in your files.
You don’t have to file the W-9 with the IRS. This simple form merely requires the IC to list his or her name and address and taxpayer ID number. Partnerships and sole proprietors with employees must have a federal employer identification number (EIN), which they obtain from the IRS. In the case of sole proprietors without employees, the taxpayer ID number is the IC’s Social Security number.
For a list of other documents to obtain when hiring ICs, see Required Documentation When You Hire Independent Contractors.
For details on the advantages of hiring independent contractors, see Pros and Cons of Hiring Independent Contractors. For guidance on how to determine whether a worker is an employee or an IC, see Independent Contractor or Employee: How Government Agencies Make the Call. For related articles, see the Employment Law Center on the Nolo site.
For a comprehensive guide to tax issues affecting landlords, including tax-related questions when hiring help, see Every Landlord's Tax Deduction Guide, by Stephen Fishman (Nolo).