With the April 15th tax deadline around the corner and the new tax year upon us I wanted to take a moment to discuss a tax scenario that i was not very familiar with until talking with a friend recently who is a property manager at a local company. My friend has a client who owns and rents property in the US but is a resident of Spain. She reports her income under a “single member” US licensed LLC and has a US tax ID number. My friend had to do some research to ensure that she was filling out the correct tax forms. She came to the conclusion that she needed to fill out Form 1042-S to report rental income subject to withholding to a client who lives in a foreign country. The 1042-S of course needs to be filled out correctly or the IRS will reject the form. Inputting the correct; income code, tax rate, Taxpayer Identification Number (TIN), and country of residence will help ensure that the tax forms get accepted.
In addition, It turns out that the IRS disregards LLCs that are “single-member” for tax purposes. This means that the rental income the person receives will be taxed on their personal tax return. The owner should have filled out form W-8ECI (W-9 for US citizens). It’s difficult for a property manager such as my friend to determine if a foreign owner is a single-member LLC and the IRS currently does dot hold the property manager liable for verifying that information.
Bottom line if the owner has a LLC with a US LLC number and there W-9 has a US address then you can 1099 them. If the property owner has a foreign address they need a W-8ECI and you will need to file form 1042-S. The good news is that the IRS will not penalize you if you have classified your client incorrectly. You will have to start withholding for taxes and fill out the correct forms.