W-9 and 1099 Forms: What Every Real Estate Professional Should Know
Commercial real estate has been the scene of many economic and regulatory shifts in recent years. While CRE brokers and agents continue to adjust to dynamic market conditions, keeping track of requirements for taxes and forms is equally important.
Typically, real estate agents operate under a brokerage as independent contractors, which means they are not compensated through regular paychecks like an employee. As a result, knowing the difference between various tax forms is essential when reporting earnings to the Internal Revenue Service (IRS). Taking a closer look at the W-9 and 1099 forms, we highlighted the key features and differences below.
What Is a W-9 Form?
Intended for tax filing purposes in the U.S., the W-9 is a basic tax form used to collect key information such as the taxpayer identification number (TIN) or Social Security number, name, address and entity structure. The information provided on this form is important for the business owner to determine the contractor’s status and whether the business owner must file a 1099 tax form with the IRS.
The 1099 form (more on that below) is usually not required when the party receiving the compensation is a corporation. However, any individual or business working with an independent contractor must collect a W-9 form and submit an informational return to the IRS disclosing payments. The independent contractor is required to fill out the W-9 form and return it to the individual or business they are receiving payments from.
The 1099 Form Used by CRE Players
A 1099 form is used to report non-employment income and there are a total of 21 information returns or 1099 forms. Each type is used to report a different kind of payment or transaction, including income earned as an independent contractor. For the latter, the two most common forms used are 1099-NEC and 1099-MISC.
Reporting payments on 1099 forms ensures the IRS that independent contractors file the required documentation to report their income properly. Entities employing the services of independent contractors are responsible for filing a 1099 form with the IRS when the individual or business (payor) pays compensation of $600 or more and the following conditions are met, with the $600 payment disbursed:
- during a tax year
- to an individual who is not an employee
- for services provided by the individual
- during the payor’s trade or business.
Real estate brokers are required to file 1099s for real estate commissions, referral fees or other types of compensation paid to broker associates, cooperating brokers, sponsored sales agents and other similar categories of professionals who provide services to the broker’s business.
Brokers must issue a Form 1099-MISC to real estate agents who received payments of at least $600 in the corresponding tax year. “MISC” stands for “miscellaneous” reporting and is necessary for filing tax returns and determining how much tax an independent contractor owes. The 1099-MISC tax form must be issued at the completion of the tax year, listing a summary of total commissions earned throughout the year.
1099-MISC vs. 1099-NEC
Until 2020, the main 1099 form used for independent contractors was Form 1099-MISC. However, as of 2020, the IRS reintroduced Form 1099-NEC as well, which had been used in the early 1980s to report any income earned while self-employed. Form 1099-NEC was initially replaced by Form 1099-MISC in 1983 because the IRS added an extra box on the existing 1099-MISC for businesses to report payments made to self-employed individuals they worked with during the tax year.
The new version of Form 1099-MISC covered non-employee compensation and other payments including prizes, awards and medical payments, rendering Form 1099-NEC unnecessary. The change, however, created confusion because businesses were required to report payments through Form 1099-MISC on different deadlines for self-employed individuals (by Jan. 31) and all other payees (by Feb. 28). To eliminate this uncertainty, the IRS reintroduced Form 1099-NEC in 2020, with a due date of Jan. 31.
The primary distinction between Form 1099-NEC and Form 1099-MISC is that a business will only use a 1099-NEC if they are reporting non-employee compensation but will use a 1099-MISC for reporting other income, including rents, prizes, royalties, awards paid to third parties, and in the case of CRE specialists, payments made by real estate brokers to agents, as stated above.
An important aspect to keep in mind is that, unlike an employee who receives a W-2 form, independent contractors must account for taxes due and are responsible for withholding and paying their own taxes. Therefore, the W-9 and the 1099 forms are essential for both sides in terms of gathering, tracking and reporting accurate earnings and paying taxes at the end of each calendar year.
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