Challenge: IRS Penalties

I submitted my tax documents to my accountant, he prepared them, and it was filed with the IRS and State. Whew…it’s finally over. What a relief! I don’t need to worry about taxes for another year. Or do I?

Do you know that if you’re audited by the IRS and you didn’t give your vendor/independent contractor a 1099-NEC you may have to pay a penalty? The IRS requires business taxpayers to report non-employee compensation to them by using form 1099-NEC. In other words, if you pay a vendor six hundred dollars or more in a tax year and use it as a tax deduction, you’re required to give the vendor a 1099-NEC, generally by the end of January. The vendor then uses it to file their tax return. Common vendors are gardeners, handymen, house cleaners, pool cleaners, plumbers, electricians, and any rents or services you pay for. Why do you need to do this? The IRS uses this information to verify that the vendor you paid has reported what you paid to them. Note: You’re not required to give a 1099-NEC form to businesses that are set up as C-Corporations or S-Corporations.

Solution: Protect Yourself

The best way to protect yourself is to know your forms. Many landlords are confused and overwhelmed about what forms to use and which ones need to be filed with the IRS. If you’re worried about getting audited once you file your income tax returns, you’re not alone. We all are! Let’s start with this, as much as we don’t want to look at our Mom & Pop business as a business, it is! You may say to yourself, “I only have one little rental. I don’t need to learn all this stuff.” But you do! The IRS looks at your rental as a business and expects you to follow all the rules. Let’s use the example from the beginning of this article, which illustrates one of the most common, yet simplest, rules broken by most landlords; forgetting to file the 1099-NEC. You might now be saying to yourself, “Well my accountant is the expert and I trust him to know all these rules and to get it done correctly, so I’m not going to worry about this one.” The bottom line is, your accountant completes your income tax returns based on the information you provide. One example is if you don’t submit to your accountant your Vendor’s W-9, how will he know to submit a 1099-NEC? Another example, if you took a bunch of rental property classes and didn’t save your receipts from those classes, how would your accountant know to add those classes as a deduction? Your accountant only knows what you disclose.

Here are some simple solutions to help ease your confusion:

  • Make an annual appointment with your accountant and share details about your business and your goals, so he has a better understanding of your business. This will help him complete a more accurate income tax return.
  • Learn the 1099-NEC process so you can fill out the forms. You can reduce your accountant fees by doing it yourself. If you want to learn to simplify the process, visit my website at simplyshiral.com and check out my class. I’ll walk you through the forms, how to fill them out, and where to mail them. Below are the forms you’ll need to be compliant with the IRS.
  1. W9 Form: This form is given to your vendor to fill out and returned to you.
  2. 1099-NEC: This form is filled out by you before sending it to the IRS.
  3. 1098: This form is filled out by you and sent to the IRS with your 1099-NEC.

Now that you know some ways to avoid an IRS penalty, what will you do to be compliant? As I stated above, make an annual appointment with your accountant so he’s always updated about your business goals. This is your start in reducing confusion and IRS penalties. Now ask yourself, “What’s my next step?”

Want to learn more? Visit my website at www.simplyshiral.com to view the simple affordable classes I offer that help you gain confidence and profits.

Shiral Torres teaches rental property management classes at local colleges and through her business, Simply Shiral. She believes keeping life simple is the key to success. She and her husband own and manage multiple properties in California and throughout the country. The author of Rental Property Made Simple (available at amazon.com), Shiral is also a volunteer support group facilitator and Walk to End Alzheimer’s committee member for the Alzheimer’s Association.