Discover the answer to the common question that tax and accounting professionals receive all the time. Should you receive 1099 if you are an LLC?
What Exactly Is The 1099 Form?
1099 is a primary information filing form that reports all the non-salary income to the IRS for federal taxation. While there are 20 different types of 1099 forms, the most used and famous is form 1099-NEC. If you have paid one of your independent contractors more than $600 in a financial year, you will need to complete form 1099-NEC.
Apart from salaries, there are multiple ways in which an individual can make money, for example, interest income, tax dividends, prize winnings, miscellaneous government payments, the sale of personal property, IRA distributions, state tax refunds, and even when the debt of a credit card of a user is forgiven. Every type of non-salaried income will have a specific form 1099 dedicated to it for reporting to the IRS.
Who Gets A 1099 Form?
As we have discussed earlier, the most common type of 1099 form is 1099-NEC, which stands for Non-Employee Compensation, and just like 1099-NEC, there are other types of 1099 forms. The rule of thumb is that any person paid $600 or more as non-employment income during a financial year will receive a form 1099.
There are myriad reasons apart from earning from a side hustle that could get a person to receive a 1099 Form. For example, if you are earning via Uber or selling services as an independent contractor, you may get it. Similarly, as discussed earlier, a person who has received a dividend, etc., can get a form 1099 if the dividend amount is above the bar set by the IRS.
What Is An LLC?
A Limited liability company, also known as an LLC, is a business structure designed to offer limited liability protection and pass-through taxation to its owners – who are also known as members. Like in corporations, an LLC also legally exists as a separate entity from its owners/members. Hence, the members of an LLC are not legally responsible for business liabilities and debts.
An LLC structure allows for pass-through taxation, which means that the income of the LLC cannot be taxed at the entity level but is taxed at the individual level. However, if the number of owners of an LLC exceeds one, a tax return has to be filed. But, any taxes on gains and losses reported by the LLC are ultimately passed through to its owners. The owners thus report the gains and losses of the LLC on their tax returns.
Types Of LLCs
LLCs have multiple types based on the number of owners of the LLC and how they are managed. In this section, we shall take a look at a few of highlighted types of LLCs and how they are operated:
- Single Member LLC
A single-member LLC is an LLC that has only one owner and mimics the basic management structure of a sole proprietorship. A single-member LLC has all the same reporting, advantages, and disadvantages—as an LLC but varies in a way that a single-member LLC is considered a disregarded entity for federal tax purposes. Being a disregarded entity will exempt an LLC from federal taxes to be reported on the entity level, and they will be included in the taxes of the individual owner.
Each state has different requirements for forming a single-member LLC. It is a lucrative option for sole proprietors looking to enjoy the benefits of limited liability and avoid the hassle of filing for the taxes on both individual and entity levels. Furthermore, since there is only one owner in a single-member LLC, the owner enjoys complete decision-making.
- Multi-member LLC
A multi-member LLC is an LLC that has more than one owner – or member. It is the most common structure of LLCs. It is formed by the business partners looking for a business structure that supports their partnership by limiting their liability on the debts and liabilities of the entity.
Ina multi-member LLC, there is no restriction on the number of members, and it could be an unlimited number unless the LLC elects for tax treatment as an S Corp, which will then limit the maximum number of owners to 100). The share of profits and losses and the initial capital contribution by each member is decided by the members of the LLC.
- S Corporation
S corporation is also known as ‘’Subchapter S corporation’’, or sometimes ‘’Small Business Corporation’’, and it is a special tax status granted by the IRS to certain corporations. Once a corporation has an S corporation status, it can pass its corporate income, deductions and credits through to shareholders of the corporations.
In easier words, S corporations are the kind of corporations that don’t have to pay federal taxes. Instead, the corporations’ shareholders share the profits and losses and report them on their income tax returns. There is a special provision by IRS that allows multi-membered LLC to choose if they want to be taxed like S corporations.
When Do LLCs Issue A 1099 Form?
Generally speaking, any time your business buys products, services or rent, that mounts up to more than $600 from a limited liability company or single individual during a calendar year, you are required to file a 1099 form for that particular contractor or vendor. Form 1099 typically needs to be issued by January 31st of each year.
How To Find Out If Your Contractor’s LLC Needs to Get 1099?
One of the most common tax forms that most business owners need to file for their independent contractors and vendors and even subcontractors is the 1099 form, to be specific, form 1099 MISC.
If you want to find out if your contractor’s LLC will get a form 1099 or not, you have to ask your contractor to fill a form – IRS Form W-9. IRS Form W-9 is there to request taxpayer identification number and certification. With this, you will find out if your contractor’s LLC needs to get a form 1099 or not.
What Happens If You File 1099 For an LLC That Doesn’t Need One?
It is not uncommon that contractors often do not file a W-9 in time or check the wrong box on their form 1099. So, if you have doubts about whether your contractor should get a form 1099 or not, it’s often recommended to go ahead and fill the form 1099 for them to avoid any problem.
Even if it turns out that the form 1099 that you filed for your contractors wasn’t required, you will not be penalized for this extra filing. However, on the other hand, if your contractors were supposed to get a 1099 and you were unable to file it for them, there is a high risk that you will end up paying a penalty of $100 for every form 1099 that you missed. So, to be on the safe side, even if you are not sure about a contractor’s form 1099, file it anyway.
Frequently Asked Questions
In this section, we shall take a look at some of the frequently asked questions about form 1099 and will provide you with the suitable answers:
- Does a limited liability disregarded entity get 1099?
Yes, if the LLC is taxed as a single-member LLC (disregarded entity) or as a partnership, the contractor always needs to receive a 1099 form. The only exception in receiving a form 1099 is if the LLC has filed as a corporation. In all other cases, the LLCs will get a form 1099.
- Which businesses are exempt from 1099?
All the business structures (besides corporations) require form 1099 issuance and reporting, but only for amounts exceeding the threshold of $600. These business structures include limited partnerships, limited liability companies, general partnerships, and sole proprietorships. All other businesses apart from these entities are exempted from a form 1099.
- Does rent paid to a corporation qualify for 1099?
It is an interesting question, and many people can find it confusing. However, if we look into the IRS publication “2018 Instructions for Form 1099-MISC“, we can see that it outlines that if you make rental payments to an S corporation or a C corporation, you are not required to issue it a Form 1099. Hence, rent paid to a corporation does not qualify for a form 1099.
- Where can you find help from the IRS on issuing 1099 forms?
There are multiple ways to contact IRS – you can write your question to the IRS, call on the IRS helpline, or email the IRS by going on their website. Email is a quick way to get your queries resolved; however, there are some cases where there is no other way apart from writing physically to IRS and attaching all the required documents.