Effective in 1993, the IRS determined that certain settlement agents are required to report on Form 1099-MISC disbursements made out of the escrow trust account to subcontractors for services in excess of $600.00 in any calendar year.

This requirement is in effect when two conditions exist:

1. The escrow company disburses from the escrow trust account all costs in connection with the project based on a voucher system from funds deposited by the general contractor (usually from construction loan proceeds)
2. The escrow company has an oversight function

This oversight function includes making sure that all approved bills are paid to avoid liens attaching to the property. In addition, the escrow company is required to make site inspections to determine if work has been completed before disbursing certain payments to subcontractors. As part of this oversight function, the escrow company has the authority to withhold payments to subcontractors if it determines certain work has not been completed. However, it is not the escrow company's responsibility to evaluate the quality of the work. It is also within the escrow company's scope to review the project's budget and to communicate to the general contractor if it believes additional funds will be required to be deposited into the escrow trust account.

The settlement agent only has the requirement to report payments out of the escrow trust account to subcontractors when it has this oversight function.

No other payments from the escrow trust account, such as for broker's commissions and termite company inspections and repairs, are required to be reported to the IRS on Form 1099-MISC.(34K Adobe PDF)
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Please contact us for Form 1099-MISC input information if this requirement affects you.

Additional topics:

Which Transactions are Subject to the Reporting Requirements
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