Making a payment to someone? Plan ahead

Hi June,

I have a quick question. I own a rental property here in San Francisco and I had a tenant who I paid off to leave the building. I paid her $20,000. I would like to write it off but the tenant refused to fill out the W-9 form. I have her new address but not her social security number. What are my options?

Rusilla


Hello Rusilla,

An overview before I answer: Whatever an indie pays someone in the course of business is a deductible business expense. And, that someone must claim the income regardless of amount received. If any individual is paid $600 or more the indie must file a Form 1099 stating the amount paid to the individual . The Form 1099 is sent to the government and to the individual.

What you are supposed to do before you pay anyone is have him or her complete a Form W-9. This provides you with the person's legal name, address and social security number. All this info is needed when you file a Form 1099.

Rusilla, you didn't do this.

Step #1: The IRS says that if someone refuses to give you the necessary info you should withhold 28% from the payment and send the withheld money it to the feds. In other words you are responsible for withholding and paying the tax of the individual you paid. Of course, since you already paid the vacating tenant that can't be done.

Here's steps 2, 3, 4, and 5.

#2: Send a letter to the tenant with a request for info. Let her know that failure to provide you with the info will cost her a $50 penalty. [Big incentive. Right?] Include a W-9 with your letter.
Keep a copy for your records. IRS suggests that you get some kind of postal receipt acknowledging delivery.

#3: If you get no response, repeat Step #2.

#4: File the Form 1099 with no social security # for the tenant.

#5: You'll get a notice from the IRS about why there's no SS#. You explain and include copies of your letters to the tenant.

You may still use the $20,000 payment as a cost of business. There is no need to forfeit such a cost but you must follow the above procedure.

For all my readers: Learn from Rusilla's error. Get the info upfront.

Best,
June