If, like most real estate pros, you’re a sole proprietor, you must file Schedule C with your return to report your business income and expenses, and show whether you have a net profit or loss for the year.
Two new lines have been added to the beginning of Schedule C, labeled “I” and “J.” Line I asks whether you made any payments during the year that required you to file IRS Forms 1099. If you answer yes, you have to answer in Line J whether you have already filed, “or will you file,” the forms.
Similar questions have been added to IRS Form 1065, U.S. Return of Partnership Income; Form 1120, U.S. Corporation Income Tax Return; and Form 1120S, U.S. Income Tax Return for an S Corporation. The same question was added to Schedule E for IRS Form 1040 in 2011.
These new questions are an attempt by the IRS to persuade businesses to file all required 1099s, particularly Form 1099-MISC, the form used to report payments to independent contractors. This is part of the IRS’s ongoing effort to prevent businesses from failing to report all their income.
When Form 1099-MISC must be filed
The basic rule is that you must file a 1099-MISC whenever you pay an unincorporated independent contractor — that is, an independent contractor who is a sole proprietor or member of a partnership or LLC — $600 or more in a year for work done in the course of your trade or business.
If you’re a broker who employs independent contractor agents, you need to file 1099s for them, as well as any other contractor you paid at least $600 during the year.
Remember, however, that a 1099-MISC need be filed only when an independent contractor’s services are performed in the course of your trade or business. You don’t have to file a 1099-MISC for payments for non-business related services. This includes payments you make to independent contractors for personal or household service — for example, payments to babysitters, gardeners, and housekeepers. Running your home is not a profit-making activity.
See my recent column, “When, and when not, to file Form 1099-MISC,” for more discussion.
Deadline for filing 1099-MISC
February 28 was the last day to file all required 1099 MISCs with the IRS, unless you file electronically, in which case you have until March 31. You should have already provided independent contractors with their copy by January 31.
You can obtain a 30-day extension on the time to file 1099s by filing IRS Form 8809, Extension of Time to File Information Returns. The form must be filed with the IRS by February 28. The extension is not granted automatically. You must explain the reason you need it. The IRS will send you a letter of explanation approving or denying your request.
Penalties for not filing
In 2011, the IRS also increased the penalties for failing to file correct information returns and payee statements. The current penalties are:
- $30 per information return for returns filed correctly within 30 days after the due date (by March 30 if the due date is February 28), with a maximum of $75,000 for small businesses
- $60 per information return for returns filed more than 30 days after the due date but by August 1, with a maximum penalty of $200,000 for small businesses, and
- $100 per information return for returns filed after August 1 or not filed at all, with a maximum penalty of $500,000 for small businesses.
As you can see, filing later, rather than never, can save you substantial penalties.
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including “Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants,” “Deduct It,” “Working as an Independent Contractor,” and “Working with Independent Contractors.” He welcomes your questions for this weekly column.