Generally, Yes. A Property Manager Does Need to Issue A 1099 to an Owner
Everyone’s tax journey is unique. Always consult your tax advisor when it comes to IRS forms such as the 1099. A property manager only needs to issue a 1099 form if they make payments totaling $600 or more in a calendar year to a property owner for rent or services. A 1099 is not required for payments totaling less than $600. However, in California, it is common for even a single month’s rent payment to exceed $600. This also applies to rent collected, but not necessarily distributed to the owner.
1099-NEC vs. 1099-MISC?
The 1099-NEC (Non-Employee Compensation) is a new form introduced in 2020 for reporting payments made to non-employee individuals or businesses for services. It replaces box 7 of the 1099-MISC form.
1099-MISC is a tax form used to report various types of income, including rent, prizes and awards, and other income payments. It contains multiple boxes for reporting different types of income. Box 7 was used for non-employee compensation before the introduction of the 1099-NEC form. We normally see the 1099-MISC used to report rents received by property managers on behalf of owners. The property manager will issue a 1099-MISC to the owner. Also, in the property management context, we see the 1099-NEC generally issued to contractors or other workers who perform work on a property either for the property manager or the owner. Things like landscaping, plumbing repairs, roof repairs, drywall, painting, etc. Whoever paid the contractor or worker should issue the 1099-NEC.
In summary, use a 1099-NEC specifically for reporting non-employee compensation. Use a 1099-MISC to report other types of income. The 1099-MISC is more general and versatile.
Why do we have to do this? Don’t the owners have to report their income anyway?
The purpose of a 1099 form is to report income to the IRS (Internal Revenue Service) that is not subject to payroll taxes (e.g. Social Security and Medicare) because it is considered to be self-employment or miscellaneous income. It is used to report various types of income, such as rental income, freelance income, and other types of payments made to individuals or businesses. Here, the primary focus is on the rental income the property manager received on behalf of the owner. The recipient of the income must report this income on their tax return, and the payer must file a 1099 with the IRS to report the amount paid. The 1099 helps ensure that the recipient reports the correct amount of income on their tax return and helps the IRS track and verify the accuracy of tax returns.
What if the property manager kept the funds and didn’t distribute any to the owner during the year?
The requirement to issue a 1099 form is based on the amount of payment made (made by the tenant to the property manager), not on whether the recipient (owner) requested a distribution. If the property manager made payments totaling $600 or more in a calendar year to a property owner for rent or services, a 1099 form must be issued. This is true whether or not the owner requested the payment or left the money with the property manager. The rules do not require a 1099 if the total payments are less than $600.
Conclusion
As always, discuss these issues with your tax advisor. Generally speaking, issuing a 1099 is a good practice. Be sure to keep this in mind before issuing any payment to vendors, including, down payments or initial deposits. Further, if you are a property manager, familiarize yourself with the rules before receiving rent on behalf of owners and always request a W-9. Rent received on behalf of out-of-state owners is treated much differently. Did you know that you can obtain free copies of the 1099-MISC and 1099-NEC from the IRS? Make sure to order them in advance and don’t forget about the 1096 form. A seasoned real estate agent with experience in property management, rental properties, and tax law can help guide you. Contact us for more details.