Waiver of dues for Owner "Managers"

Started by PatrickO1 • 23 replies • 2556 views

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PatrickO1 (Michigan)
Posts: 13

Posted:

I own a unit in an Association that has 82 units. For the last 20 years the Association has been managed by three Owners acting as the Grounds Manager, Pool Manager, and Irrigation / Sprinkler System Manager. The Manager positions provide these services in lieu of paying dues which now are $1,800 per year. For the most part each Manager spends their time coordinating and overseeing service providers / contractors on behalf of the Board. The Association does not carry any special insurance (liability or workman comp) for the Managers. There is an Association Rule and Regulation documenting the expectations of each position. The CPA that is independent and maintains the Association's books has not until this year issued the Managers any type of 1099 (either misc. or barter).

The issuing of the 1099's has caused at least one Manager to resign since they now feel they have to declare the $1,800 as income and pay various federal and state income taxes. I am wondering if this arrangement is unique? Do you believe it Is an acceptable practice? Thoughts?

LorraineF1 (Oregon)
Posts: 19

Posted:

Quote:

Posted By PatrickO1 on 04/20/2015 5:43 PM
I own a unit in an Association that has 82 units. For the last 20 years the Association has been managed by three Owners acting as the Grounds Manager, Pool Manager, and Irrigation / Sprinkler System Manager. The Manager positions provide these services in lieu of paying dues which now are $1,800 per year. For the most part each Manager spends their time coordinating and overseeing service providers / contractors on behalf of the Board. The Association does not carry any special insurance (liability or workman comp) for the Managers. There is an Association Rule and Regulation documenting the expectations of each position. The CPA that is independent and maintains the Association's books has not until this year issued the Managers any type of 1099 (either misc. or barter).

The issuing of the 1099's has caused at least one Manager to resign since they now feel they have to declare the $1,800 as income and pay various federal and state income taxes. I am wondering if this arrangement is unique? Do you believe it Is an acceptable practice? Thoughts?

I'm curious about whether 1099s are required for board members who do services in exchange for no payment of dues? Is this a state by state law?

TimB4 (Tennessee)
Posts: 21,059

Posted:

Unfortunately, it does happen and the waiving of assessments is the wrong way to pay to for services. Everyone, in accordance with the CC&Rs, are required to pay assessments.

If someone is doing services for the Association and is to be compensated, they should still pay their assessments and the Association should write a check for services provided.

1099-misc are required to be issued to all independent contractors. Even if assessments are waived (which is wrong), a 1099-misc should be issued (actually, this may be a different form as it's basically a barter agreement).

If a member, Director or Officer are being reimbursed for supplies - that is different.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By LorraineF1 on 04/20/2015 6:19 PM
I'm curious about whether 1099s are required for board members who do services in exchange for no payment of dues? Is this a state by state law?

Per 26 USC Sec. 61 of the IRS Code, Gross Income is defined as "all income from whatever source derived." Sub-section (1) specifically includes: "Compensation for services, including fees, commissions, fringe benefits, and similar items."

No way to legitimately get around the obligation to pay taxes on HOA fee exemptions in exchange for services.

Sikubali jukumu. Read all posts at your own risk.

BruceF1 (Connecticut)
Posts: 2,535

Posted:

Quote:

Posted By PatrickO1 on 04/20/2015 5:43 PM
The issuing of the 1099's has caused at least one Manager to resign since they now feel they have to declare the $1,800 as income and pay various federal and state income taxes. I am wondering if this arrangement is unique? Do you believe it Is an acceptable practice? Thoughts?

The issuing of the 1099s was entirely proper, and required by law.

Bartering income is reported on Schedule C or Schedule C-EZ. When barter income is received through a barter exchange, a 1099-B is issued; otherwise, a 1099-MISC is normally used. More information can be found in IRS publication 525.

An example similar to your case, often used by the IRS to describe bartering income, is this:

"You own a small apartment building. In return for 6 months rent-free use of an apartment, an artist gives you a work of art she created. You must report as rental income on Schedule E (Form 1040) the fair market value of the artwork, and the artist must report as income on Schedule C or Schedule C-EZ (Form 1040) the fair rental value of the apartment."

JohnB26 (South Carolina)
Posts: 1,001

Posted:

DITTO

and

DITTO

MarkM31 (Washington)
Posts: 556

Posted:

Quote:

Posted By LorraineF1 on 04/20/2015 6:19 PM

I'm curious about whether 1099s are required for board members who do services in exchange for no payment of dues? Is this a state by state law?

By definition, the states have nothing to do with 1099s. They are all Fed.

KerryL1 (California)
Posts: 14,550

Posted:

Our CC&Rs forbid directors from receiving compensation, Patrick. I believe that means the type of arrangement your HOA has. Don't yours?

BruceF1 (Connecticut)
Posts: 2,535

Posted:

Quote:

Posted By MarkM31 on 04/21/2015 9:09 AM
By definition, the states have nothing to do with 1099s. They are all Fed.

Not exactly true.

While it is true that the 1099s are a federal (IRS) form, many states receive earnings information directly from the IRS (our computer age). Also, taxes in many states are based on income reported on IRS 1040s. So, indirectly, 1099s do have an effect on state income taxes. Failure to report earnings on a 1099 to the state taxing authorities may well result in a tax notice from the state.

JohnB26 (South Carolina)
Posts: 1,001

Posted:

I am wondering if this arrangement is unique? ~ not unique, merely wrong

Do you believe it Is an acceptable practice? ~ no, merely convenient

Thoughts? ~ tax evasion comes to mind

BruceF1 (Connecticut)
Posts: 2,535

Posted:

Quote:

Posted By MarkM31 on 04/21/2015 9:09 AM
By definition, the states have nothing to do with 1099s. They are all Fed.

I neglected to mention in my previous post that there are 3 copies of the 1099-MISC that are completed: Copy A goes to the IRS, Copy B goes to the recipient, and Copy 1 goes to the state. So, it is not strictly a federal form.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By BruceF1 on 04/21/2015 1:22 PM

I neglected to mention in my previous post that there are 3 copies of the 1099-MISC that are completed: Copy A goes to the IRS, Copy B goes to the recipient, and Copy 1 goes to the state. So, it is not strictly a federal form.

I was unaware of this.

The instructions with the 1099-misc software and forms didn't mention that requirement.

LorraineF1 (Oregon)
Posts: 19

Posted:

So if this situation exists and the HOA is not filing a 1099 for the owner/director who gets free dues for services, would the only way to deal with it be to confront the Board about that? The annual report does mention filing of 1120s for two owners/directors, but only says that this one director gets free dues, with no mention of a 1099 being filed. Depending on how many years this has been in force, wondering if the IRS allows 'ignorance' pleas for filing?

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By LorraineF1 on 04/21/2015 6:46 PM
So if this situation exists and the HOA is not filing a 1099 for the owner/director who gets free dues for services, would the only way to deal with it be to confront the Board about that?

No. The other ways would be to:

a) Gather support and vote those who aren't doing it out - then start compliance.
b) Report the issue to the IRS and let the IRS investigate and take appropriate actions

Quote:

Posted By LorraineF1 on 04/21/2015 6:46 PM

The annual report does mention filing of 1120s for two owners/directors, but only says that this one director gets free dues, with no mention of a 1099 being filed.

Typically, if mentioned at all, it would be in the Treasures report to the Board sometime in January, February or March.

Quote:

Posted By LorraineF1 on 04/21/2015 6:46 PM

Depending on how many years this has been in force, wondering if the IRS allows 'ignorance' pleas for filing?

I have been unable to find what penalty, if any, exists for failure a corporation's failure to file a 1099-misc.

As for the individual's failure to report the income (regardless if a 1099-misc has been filed or not), the IRS has no problem auditing several years of tax returns.

BruceF1 (Connecticut)
Posts: 2,535

Posted:

Quote:

Posted By TimB4 on 04/21/2015 7:05 PM

the IRS has no problem auditing several years of tax returns.

The IRS usually goes back only 3 years unless outright intentional fraud is suspected, which is difficult to prove.

BruceF1 (Connecticut)
Posts: 2,535

Posted:

Quote:

Posted By TimB4 on 04/21/2015 4:43 PM

I was unaware of this.

The instructions with the 1099-misc software and forms didn't mention that requirement.

The following statement appears in the instructions for a 1099-MISC.

"If a state tax department requires that you send them a paper copy of this form, use Copy 1 to provide information to the state tax department. Give Copy 2 to the recipient for use in filing the recipient's state income tax return."

IRS Publication 1220 has a section that describes the Combined Federal/State Filing Program:

"The Combined Federal/State Filing Program (CF/SF) was established to simplify information returns filing for payers. Through CF/SF, the IRS electronically forwards information returns (original and corrected) to participating states.

The following information returns may be filed under the CF/SF:
• Form 1099-B, Proceeds from Broker and Barter Exchange Transactions
• Form 1099-DIV, Dividends and Distributions
• Form 1099-G, Certain Government Payments
• Form 1099-INT, Interest Income
• Form 1099-K, Payment Card and Third Party Network Transactions
• Form 1099-MISC, Miscellaneous Income
• Form 1099-OID, Original Issue Discount
• Form 1099-PATR, axable Distributions Received From Cooperatives
• Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts,
etc.
• Form 5498, IRA Contribution Information"

TimB4 (Tennessee)
Posts: 21,059

Posted:

Thanks Bruce.

BruceF1 (Connecticut)
Posts: 2,535

Posted:

Quote:

Posted By TimB4 on 04/22/2015 6:49 AM
Thanks Bruce.

LorraineF1 (Oregon)
Posts: 19

Posted:

Do I understand this correctly that all people doing work for an HOA, whether by contract or as an employee, (or by "free dues") should have either an IRS Form 1120 OR an IRS Form 1099 filed annually by the HOA. ?

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By LorraineF1 on 04/22/2015 4:51 PM
Do I understand this correctly that all people doing work for an HOA, whether by contract or as an employee, (or by "free dues") should have either an IRS Form 1120 OR an IRS Form 1099 filed annually by the HOA. ?

No.

Per the IRS, 1099-misc are to be issued to independent contractors and attorney/law firm if the income was $600 or more.

As I understand it, contracts with other companies (landscape maint., snow removal, etc.) do not require the issuing of 1099's.

From the 1099-misc instructions:

File Form 1099-MISC, Miscellaneous Income, for each person to whom you have paid during the year:

At least $10 in royalties (see the instructions for box 2) or broker payments in lieu of dividends or tax-exempt interest (see the instructions for box 8);

At least $600 in:

rents (box 1);

services performed by someone who is not your employee (including parts and materials), box 7;

prizes and awards (see instructions for boxes 3 and 7;

other income payments (box 3);

medical and health care payments (box 6);

crop insurance proceeds (box 10);

cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish (box 7);

generally, the cash paid from a notional principal contract to an individual, partnership, or estate (box 7);

Payments to an attorney. See Payments to attorneys, later; or

Any fishing boat proceeds (box 5).

In addition, use Form 1099-MISC to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment (box 9).

You must also file Form 1099-MISC for each person from whom you have withheld any federal income tax (report in box 4) under the backup withholding rules regardless of the amount of the payment.

BruceF1 (Connecticut)
Posts: 2,535

Posted:

Quote:

Posted By TimB4 on 04/22/2015 5:34 PM
As I understand it, contracts with other companies (landscape maint., snow removal, etc.) do not require the issuing of 1099's.

This is correct only if the companies are incorporated and report their income on Form 1120.

Payments for such services that are done by individuals who must file their business income on Schedule C, must be issued a 1099-MISC. I do many returns that include Schedule C and several accompanying 1099s every year.

BruceF1 (Connecticut)
Posts: 2,535

Posted:

Quote:

Posted By BruceF1 on 04/23/2015 6:15 AM

Posted By TimB4 on 04/22/2015 5:34 PM
As I understand it, contracts with other companies (landscape maint., snow removal, etc.) do not require the issuing of 1099's.

Actually, even this is oversimplified.

Although filing taxes is rather simple for most individuals, there are enough little exceptions to make some, otherwise seemingly simple, returns complicated. My boss says "that's what gives us job security."

I once remarked to my boss that all of the returns we did were complicated and didn't seem to fit the textbook examples. His reply was, "That's why they have to come to us. Those that do try to do such returns on their own will come to us after they receive their tax notices from the IRS."

PitA
Posts: 311

Posted:

In order to NOT be required to send out a 1099 the HOA must have on file a W-9 from the incorporated payee.

The W-9 is a 'self certification' by the vendor/payee.

may not be perfectly worded

(former treasurer)

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