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Hey there, fellow real estate investors, FIRE enthusiasts, and tax aficionados! Welcome to "Real Estate is Taxing" – your go-to weekly podcast for all things real estate taxes, hosted by Natalie Kolodij, EA- Real Estate Tax Strategist and dry humor extraordinaire.
Each week, we're breaking down complex tax topics into bite-sized, understandable explanations, with no regard for how many obscure references it takes to get there.
Speaker: Welcome to Real Estate is Taxing,
where we talk about all things real estate
tax and break down complex concepts into
understandable, entertaining tax topics.
My name is Natalie Kalady, I'm
your host, and I am so excited
that you've decided to join me.
Microphone (Shure MV7): Issuing
10 90 nines are a crucial step for
the majority of business owners.
And unfortunately there are some
commonly made mistakes regarding
who needs to issue these.
I'm going to walk you guys through
three mistakes people make, when
it comes to issuing 10 90 nines.
The first mistake that I often see
when someone is issuing a 10 99.
Involves a business where parents are
employing their children who are under 18.
To work.
In their business.
Well, employing your children
is a fantastic tax strategy.
And can allow you to pay your minor
child without incurring payroll taxes.
And effectively shift income
from your higher adult bracket.
To their 0% tax rate.
It has to be done correctly.
Check out episode 17.
If you're looking for more
information on this strategy.
When someone is employing their children.
It needs to be treated as though
they are employing their children.
And the IRS has very specific
requirements about who qualifies to
be a 10 99 independent contractor.
Versus who needs to be issued a W2.
And treated as an employee.
One of the key differences
between the two classifications.
Is if someone has control over
only the outcome of something.
Versus if they are being controlled
with the entire process to
get to that outcome as well.
When it comes to a minor child who
is working in someone's business.
It is very unlikely that they have
absolute free rein to accomplish broad
tasks with no additional guidance.
Or oversight from their parents.
Because of this, it is
incredibly unlikely.
That's someone who is
employing their children.
Could issue them a 10 99 and have that
be correct for the work they are doing.
Additionally.
One of the key benefits to
paying someone's children,
to work for their business.
Is the fact that the child is able
to earn up to the standard deduction.
And not have to file a tax return.
The standard deduction is $14,600.
However.
If someone has any more than
$400 of self-employment income.
They are required to file a tax return.
So the first huge mistake I see
with businesses issuing 10 99.
Is one, a business.
Issues their child or
children, 10 90 nines for work.
They completed for the business that
should have been paid as a W2 employee.
The second mistake I see when
it comes to issuing 10 90 nines.
Is for landlords to believe they
have no requirement to issue a
10 99 to anyone who did more than
$600 of work for their properties.
This used to be the case.
If someone was indeed not in the
trader business of operating a rental.
But the majority of rental properties.
Do rise to the level of
being a trader business.
Which is broadly defined.
As a continuous, ongoing
regular involvement.
For a profit motive.
So unless someone has really
just inherited a property,
they've never visited it.
They've never raised rent.
They ignore it.
If you are someone who
intentionally bought real estate.
To lease to others.
With the intention of
making money from that.
Especially if it's more than one property.
There is a very good chance.
It rises to the level
of a trader business.
And you should also be issuing 10
90 nines at the end of the year.
This became a more prominent matter.
When the 1 99 a QBI deduction
was released a few years ago.
There was a lot of controversy on
whether or not rentals qualified.
And based on the defining code.
Uh, rental that rises to the level of a
trader business will absolutely qualify.
However, because a lot of
people were uncomfortable with
having to interpret that level.
The IRS did also release a safe Harbor
related to rentals and the QBI deduction.
I personally ignore that safe
Harbor and just go off of the
actual code provision of activities,
rising to a trader business.
What the QBI deduction is, is it allows
a business to have a 20% deduction.
On any net.
Income.
After all other expenses.
So if your rental activity rises to
the level of a trader business, you
are involved for a profit motive.
Then there is a good chance that
you are a trader business and that
you qualify for the QBI deduction.
And to farther and forced that and
make sure you are not misclassified.
That you should be issuing.
10 90 nines to anyone you pay more than
$600 to in the course of your business.
I will add as a caveat that corporations
do not need to be issued 10 99.
So if you know that a contractor
or someone who has done work
for you is definitely structured
as a C or an S corporation.
They will likely not
need to be sent a 10 99.
The final mistake.
I see when it comes to a
business issuing a 10 99.
Is when a business.
Chooses to issue a 10 99.
To an owner shareholder who
should have received wages.
The premise here being.
That if someone is an S or a C Corp,
part of the requirement is that
they take a reasonable payroll.
What we often see is
an S Corp shareholder.
Who did not take any W2 wages
during the year as legally required.
Because that is part of the legal
requirement that shareholder would
be paying normal payroll taxes on the
amount of that reasonable payroll.
So there are tax professionals,
bookkeepers people
preparing their own taxes.
Who will think?
Well, because I didn't do that.
The next best thing would
be issuing myself a 10 99.
So that I am still paying some type of
payroll tax on some amount of the income
I'll be paying self-employment tax,
both halves of it on that full 10 99.
Unfortunately.
This is still incorrect and two wrongs.
Don't write the tax situation.
So while the intention.
For still having to pay
some type of applicable tax.
Is a good mindset.
It, unfortunately, isn't the
correct way to fix this problem.
In this situation.
There has been lots of guidance that
a salary cannot be distributions or
a salary can not be paid as a 10 99.
When it comes to this, we do have a
tax court summary opinion, 2013 dash
62, or this was really reiterated.
So if you are a shareholder
or if you are working with a
client who has a shareholder.
And maybe they have an S corporation.
They are in a position where they should
be taking a reasonable amount of salary.
And that didn't happen during the year.
You now have to make the choice.
To do an after the fact payroll.
And have some penalties on
doing those reports late.
Or to correct the matter going forward.
But doing an additional thing
incorrectly because a W2 wasn't issued.
And instead issuing a 10 99.
That is not a valid fix.
For a shareholder not having taken.
An appropriate reasonable
amount of a required W2 payroll.
This creates in addition to just
being an additional incorrect action.
It opens up several liabilities
for that shareholder.
At the starting point.
If this is reclassified to
W2 income, if ever looked at.
By the IRS.
Then not only will it be switched
over to the correct form?
But there will be penalties, interest,
et cetera, that relate to that.
Having not been filed and done correctly.
Back when it should have been.
So in issuing a 10 99, when
there should have been a W2.
You are not fixing the problem.
You are creating a second inaccuracy
and leaving something open to
incur penalties down the road.
The next issue with this.
Is it as not.
An allowable payment.
For what it was made for, you are
not allowed to pay a wage on a 10 99.
So then the next question become.
Is that amount paid on 10 99.
Actually a deductible
expense to that corporation.
Because it was improperly used.
It was not an actual valid payment.
So can that corporation actually
take a deduction for giving
the shareholder a 10 99?
When, what it was a payment for was wages
and wages can not be paid as a 10 99.
the intention is to try to correct the tax
owed, but in doing so you are opening up.
A lot of risk for the taxpayer by now
having multiple errors on that tax return.
Instead of just one.
I'm sure there are countless other common
mistakes that come up with 10 90 nines,
but these are the top three that I run
into and I wanted to make you aware of.
If you are currently paying a child on
payroll, but issuing them a 10 99 instead.
Or if you are currently someone who
owns rental real estate, but you are not
sending 10 90 nines to those who do more
than $600 of services or work for you.
Or if you are an S corporation shareholder
who is not taking a W2 and do you or your
accountant has issued you a 10 99 instead.
Any of these actions are incorrect
and you should look at the best
way to correct them and discuss
this with your tax professional.
Looking at the potential risks and
benefits and the most reasonable way.
To get in compliance.
As always, I hope that this
episode added some value.
And if you know someone who might be
having one of these 10 99 issues, Please
feel free to share this episode with them.
And I will talk with you guys next week.
Mhm.