Will I Receive a Form 1099 for Rental Income?

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Saira Shabbir, CPA, MAcc

Saira Shabbir is a Certified Public Accountant (CPA) with over 12 years of accounting experience working with multiple companies. She works with small businesses as their outsourced accountant/controller providing month-end accounting services, Accounts Payable/Accounts Receivable Management, Financial Reporting, etc. She helps businesses optimize their accounting processes and reporting functions at SSY Accounting Solutions.

Are you a property owner and wondering if you will be receiving a 1099 rent form from your tenant? If so, you're not alone.

Before the 1099 tax deadline is up, you need to find out if you will be receiving a 1099-MISC form from your tenant. While it sounds easy enough, the answer depends on a few factors: how you got paid and the amount received.

If you will be receiving a 1099 rent form from your tenant, it will most likely be a 1099-MISC tax form.

What Is Form 1099-MISC?

A form 1099-MISC reports non-employee compensation for the same year of service. This non-employee compensation is usually from an individual or business. It is one of the most popular forms in use from the 1099 series of forms.

Freelancers and independent contractors used to receive 1099-MISC. Now, they receive a 1099-NEC form from clients not long after the end of the tax year. The main point of the form 1099-NEC is to help the IRS pinpoint the income earned by independent contractors.

Freelancers, independent contractors, and those who are self-employed receive this type of form. A 1099-NEC goes out to every contractor who received $600 in income during the year. Other types of 1099 forms report extra compensation, including rents, healthcare, attorney payments, and more. Be sure to file before the 1099-NEC due date.

The bottom line: You should use the 1099 form for rent when:

You are paying for the income of taxpayers who are not your employees. This includes independent contractors, self-employed workers, and freelancers.
Reporting non-employee compensation such as rent, prizes, and awards.
You earn $600 or more in a year due to rent payments.

AirBNB 1099 hosts who receive $600 or more in other reportable income (including awards and promotional payments), will receive a Form 1099-MISC from Airbnb as well.

How Do You File a 1099-MISC Form?

When filing the 1099-MISC form on the IRS website, you will notice that the Copy A form is in red. You should not print this copy since it is only for IRS use.

You should complete and print the parts of the form that are in black.

Send copy 1 to the recipient's state tax department
The recipient keeps copy B
Copy 2 is for the recipient's state tax return
The payer keeps copy C

The payer provides their name, address, and social security number. You also need to provide the recipient's name and address.

On the 1099-MISC form, there is a row of boxes where the payer will confirm the type of payment made. This may include rents in box 1, with royalties in box 2.

Some may also need to fill out box 4. This is the federal income tax withheld. You may also need to fill out box 16, which is the state tax withheld.

When Do You Need to File Form 1099-MISC?

The form 1099-MISC/1099-NEC is a necessity if you pay a non-employee more than $600 that year. This includes both unincorporated, independent contractors, as well as rental-related services.

There are some instances where you do not need to file a form 1099-MISC. If you pay an independent contractor via online payment, then you do not need to file. Online payments such as Venmo, PayPal, Zelle, etc., all qualify.

How to Know When to File

It does not matter how many jobs for which you are filing. You will need a form 1099-MISC for individual and various jobs. This includes payments made to property managers, handymen, etc.

The hard part is trying to remember if you paid an independent contractor more than $600 in a year. You also need to factor in payments for materials to perform the service. If you hire someone to remove snow and they charge you extra for items such as salt, you need to add in that cost.

Before filing, you must find out if you are in the business of renting the property. You know if you are in the business of renting the property if it is in operation for monetary profit.

If you own a property as an investment only, you are not in a trade or business. You are also not in a business if you hire a management company to handle all property-related issues.

Which Rental Property Payments Can You Report on a 1099-MISC Form?

It is crucial to know if an independent contractor earns more than $600 that year. Say an independent contractor performs snow removal services one day. The contractor may add in the charge for salt. When filing, you need to factor in the cost of all materials used to perform services.

If you sell material items to a customer, you do not need to fill out a 1099-MISC form. If you sell merchandise and services, then you may need the 1099-MISC form.

You need to report amounts of $600 or more on a 1099-MISC form for various types of rent payments, including:

Real Estate Rentals

There are exceptions to filing depending on how you pay. It is not necessary to report 1099 rent payments on office spaces.

You can skip reporting these rent payments if you already paid them to a real estate agent or property management company.
In this case, the real estate agent or property manager is who must use the 1099-MISC form. This is to report any rent paid by you to them.

Machine Rentals

You can file machine rentals such as bulldozers, snow blowers, and more. The leased machines just have to be used for the purpose of your business. You can also include office equipment such as postage machines, computers, and printers.

If the machine rental is part of a contract including both use and operation, be sure to prorate the rental. You can prorate the rent of the machine and the operator's charge.

Hotel and Meeting Room Rentals

You can also report hotel room and meeting room rentals on the 1099-MISC form. Space rentals also include pasture rentals such as grazing land (if that applies to your profession). Not all these payments qualify for reporting, so double-check with your financial advisor.

Tax Classification

Once you know how much you need to report for, you must think about your business's tax classification. The tax classification is like the legal structure.

Some entities have a tax classification that differs from their legal structure. The more well-known of these exceptions include the LLC (limited liability company). You can elect to count your entity as an S-corporation. You can do this by filing forms 2553 and 8832

When filling out the 1099-MISC form, you will need to answer a few questions about your contractor. You can get this information from the contractor's W-9 form.

1099-MISC Exemptions

You are exempt from filing a 1099 if you paid less than $600 to the independent contractor. You are also exempt when buying. If the rental property owner is a corporation, you do not need to file a 1099 form.

This exception is only if the property is known as a corporate entity. Attorney fees paid to a corporate legal entity do not count. Although, attorney fees that are more than $600 require a 1099-MISC form submittal.

Who Should File a 1099-MISC Form?

Freelancers, independent contractors, and self-made employees may file a 1099 form.

Those who report non-employee compensation generally use the 1099-NEC form. While slightly similar to the 1099-MISC form, it is also very different. Make sure that you have a good understanding of both.

Landlords who make specific payments will need to file a 1099-MISC form. These payments include those made to property managers, attorneys, contractors, etc.

Final Say

It can be confusing when deciding whether to file form 1099-MISC. When this happens, it is best to consult an outside party such as Bonsai. They can shed light on whether you are making the right decision.

A third party can help you be more organized by taking care of time-consuming tasks for you. For example, Hello Bonsai can help with the following:

Expense tracking - import your expenses to save on tax write-offs
Profit/loss - tracks your profit during various times of the year
Retrieves quarterly and annual tax reminders

So why not give Bonsai's freelancer tax software a try for free?

FAQs

Filling out a 1099 form about rent payments can be confusing. Below is some more information on 1099s and rent.

Do co-working companies such as WeWork require 1099 for rent?

Any type of rent requires a 1099 form, including machine rentals. The IRS instructions advise that "all real estate rentals paid for office space require a 1099-MISC form." You do not need to report office space rentals if you made payments to a real estate agent.

What additional information should I include on the form 1099-MISC?

Besides the payments you receive, the 1099-MISC requires personal information. This includes your name, address, social security number, etc.

There will be a tax classification of each payment. They will be in various boxes on the form, depending on the reason for payment.

Do landlords need to file form 1099-MISC?

It is now a requirement that all landlords file form 1099-MISC. Landlords also benefit from important tax benefits such as:

Home office deduction.
Start-up expense deduction
Deducting the cost for attending rental-related meetings, seminars, conventions, etc.
The 20% pass-through deduction. This lets you deduct up to 20% of your net rental income each up until 2025.

Try a tax receipt organizer app to automatically track your expenses. When your rental transactions double as a business transaction, you qualify for the best tax treatment when selling your rental property. All gains act as capital gains that are susceptible to a lower tax rate.

If the property sells at a loss, you can deduct the loss without a limit against your income. These types of losses have an annual limit of $3,000.

When is form 1099-MISC Due?

Deadlines vary depending on the state. In general, the recipient must postmark the 1099-MISC copy on or before January 31st, (or February 1 in 2021 because January 31st fell on a Sunday).

If you have information in boxes 8 or 10, your state must receive your copy by February 16, 2021.

IRS filing via paper due by the beginning of March 2021, while electronic filing for 1099s are due at the end of March 2021.

It is crucial to make sure to file 1099s on time if you qualify. Here is how you can file a 1099 extension if you need more time. Learn and understand your 1099 requirements for your rental business. If you have any questions or confusion, reach out to an accountant to help with any concerns.

Do I need to pay quarterly taxes if I am self-employed?

If you are a freelancer or self-employed and receive a form 1099 or are paid directly from your clients/customers, you might make estimated tax payments quarterly. Speak to a tax professional and make a note of the deadline to avoid any penalties.

You might need to make estimated tax payments quarterly. If you are a freelancer or self-employed, then you should speak to a tax professional.

Make sure that you understand the filing process, deadlines, etc., before you file. This is important to make sure that you do not miss any deadlines or receive any penalties from the IRS.

Disclaimer: Tax rules frequently change and are highly specific to your situation. Please consult a qualified tax professional.

What Defines a Verbal Contract?

A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.

Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.

Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.

The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.

Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.

When is a Verbal Agreement Legally Binding?

For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:

Offer and acceptance: An offer is made and accepted by another party involved in the agreement;
Consideration: The involved parties must exchange something of value (money, a service, time, etc), this is known as consideration;
Intention and certainty: All parties must fully understand the terms of the contract and intend to make a legally binding agreement freely; and
Capacity: The parties must have the capacity to legally enter into the contract; they're above age and of a stable mindset.

Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.

How strong is a verbal agreement in court?

Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.

If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.

That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.

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When are verbal agreements not enforceable?

There are some types of contracts which must be in writing.

The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:

The sale of real estate or vehicles
Real estate leases lasting longer than one year.
Property transfer following the death of the owner.
The case of a party agreeing to pay debt for someone else.
Any contract that requires more than a year to fulfil.
A contract involving and exceeding a specified amount of money (which varies by state).

Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.

Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.

How are Verbal Contracts Enforced?

Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?

How can you prove an oral contract?

Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!

If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.

Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.

Written vs Verbal Contracts: What's the Verdict?

Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.

So, ultimately, the question is: written or verbal agreements?

Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.

Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.

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