Filing tax returns can be a hassle for anyone. Still, it gets especially tough if you own a limited liability company (LLC) as an independent contractor. Luckily, we've got you covered.
If you're a freelancer or run a small business, here's everything you need to know about the IRS 1099-MISC form, including when to file a 1099 and when to send a 1099 to a contractor.
What is Form 1099-MISC?
The 1099 form, also known as the 1099-MISC, is one of the most common forms for independent contractors and freelancers to file.
Until recently, Form 1099-MISC is where non-employee compensation from clients or vendors that's more than $600 a year was reported along with other miscellaneous sources of income such as rent.
The IRS updated this with Form 1099-NEC as the current form to report non-employee compensation. Meanwhile, the 1099-MISC is still used to report miscellaneous income such as healthcare payments, rents, prizes, or other awards as long as they total more than $600.
Businesses and anyone with an LLC will use the 1099 form to report payments made to independent contractors or freelancers throughout the year. Once again, those payments for each person need to equal more than $600 annually to get a 1099. Contractors will not get a 1099 under $600 in payments.
Do LLC's get a form 1099-MISC?
If you're a single-member LLC or taxed as a partnership: you will receive a 1099 from a company that pays you $600 or more in annual income. Meanwhile, LLC's taxed as an S Corporation do not receive a 1099.
While that's the short answer, you might need more clarity on whether the above applies to you.
To file your income tax properly with the Internal Revenue Service, you need to know when to issue or receive a 1099. However, figuring out who needs to fill out a 1099-MISC or a 1099-NEC can be tricky.
The form may apply to independent contractors and subcontractors. Some businesses may also need to file one for their vendors. So keep reading to see how the type of LLC affects the 1099 filing.
Types of LLCs
Not all LLCs get a 1099. It comes down to the type of limited liability company and business structure. Here's a quick rundown of the different LLC requirements/structures and what types of tax forms they need.
Single Member LLC
With a single-member LLC, you're the only owner and the only person responsible for the company. You may also hear single LLCs referred to as "disregarded entities," but they mean the same thing. Freelancers and independent contractors both tend to form single-member LLC's for their small businesses.
Single-member LLCs will need to report their earnings on Form Schedule C on their individual tax return. If you're a business owner who paid a single-member LLC more than $600, you'll need to issue them a 1099-MISC.
Although not as many LLCs may also file as S corporations, it is possible. Technically, S corporations aren't a type of business but rather a tax election. If they meet the requirements, some business owners may file their tax return as an S corporation to prevent corporate-level double taxation.
Business owners in an S corporation are called "shareholders." The government considers you an employee of your corporation, and you'll also need to pay yourself a reasonable salary. When it comes to receiving or filing 1099s, S corporations don't need to receive 1099s.
Suppose you're the one issuing a 1099 to a contractor or vendor. In that case, it can be tricky to tell if they're an S corporation from the paperwork, so you may need to ask directly. Most LLCs only identify themselves as "LLCs" on paper, but if you're unable to ask, you may want to file a 1099 to be safe.
I always have my clients ask their vendors to fill out form W-9 (You are supposed to have these on file for all independent contractors and other vendors). This form will let you know if the company is a single-member LLC or not. If you have this on file, and the vendor filled it out incorrectly (stated they were an S-Corp but they were really an LLC), you won't be on the hook with the IRS.
Partnerships, sometimes called LLPs, are similar to single-member LLCs, but you co-own the business with someone else. Partnerships will need to file another form with the IRS, Form 1065, a partnership tax return.
The IRS scrutinizes tax returns for partnerships similarly to how they look at single-member LLCs filed on a Schedule C. You'll most likely be subject to self-employment tax. And, just like a disregarded entity, you'll need to issue a 1099-MISC form for an LLP as well.
What Happens if You Don't File a 1099 with the Internal Revenue Service (IRS)?
When you're issuing a 1099 form to an LLC or LLP, what happens if you don't file the 1099-MISC or 1099-NEC form? Well, since the IRS tracks you for the tax that you owe, you're almost guaranteed to end up with an IRS audit or tax notice - even if it was an honest mistake.
The same can be said if the 1099-MISC and 1099-NEC you receive don’t match your actual earnings.
If your 1099 missed your actual earnings, or if you didn't realize you needed to file a 1099-MISC, you should file a 1099 amendment to your individual tax return and include the income from these missing 1099s on there.
How to Tell if Your Contractor Needs a 1099 Form
Tax season is approaching, and you've paid more than $600 to a contractor that's registered as an LLC, but you're not sure whether you need to issue a 1099-MISC or a 1099-NEC? In some cases, the contractors themselves may not even know whether they need to receive a 1099 form from you.
Fortunately, there is an official legal process for figuring it out. Ask your freelancer or contractor to fill out Form W-9, which is a "Request for Taxpayer Identification Number and Certification."
On the W-9 form, the IRS directly asks how contractors set their businesses up for tax purposes, using these options:
Individual or Sole Proprietor
LLC or Disregarded Entity
C Corporation (C-Corp)
S Corporation (S-Corp)
If they do their business as an LLC, the form also asks contractors to mark whether they're taxed as a corporation or a partnership. If you see that they've checked the box for a corporation (C-Corp or S-Corp), you don't need to stress about issuing them a 1099.
But, if they've marked themselves as single-member LLC or a partnership, they'll need to receive a 1099 form. Please note that 1099-NEC is only issued for services rendered and not for products sold.
As I mentioned earlier, the W-9 form can prevent you from forgetting to issue a 1099 (or issuing one to a contractor that doesn't need it). Many businesses make it a standard step during tax time to send their contractors a W-9 to fill out. You’ll be happy you did it too when tax time comes.
So, do LLCs get 1099s? It depends on how the business structure and how the LLC is taxed. If you're filing as an LLC or LLP, then yes. S corporations and C corporations do not.
The rules and guidelines surrounding 1099 forms can feel overwhelming, especially if you're trying to figure out if you need to file or issue a 1099-MISC to an LLC. The good news is that you don't need to try and wade through it on your own to stay legal- at Hello Bonsai Tax & Accounting Software, we can handle the heavy lifting for you.
You won't need to worry about any more guesswork with 1099s, tax returns, or even tax-exempt interest. Track 1099 expenses and income for your freelance business. Get ahead of your LLC quarterly tax payments with ease with Bonsai Tax.
Have more questions about 1099 forms and LLCs? Here are some questions that people also ask about this topic.
When do you need to issue a 1099-MISC/1099-NEC?
Since contractors and LLCs will need time to file their own taxes, there's a different deadline for issuing 1099-MISC/1099-NEC forms. The deadline to file in 2021 was February 1st, because January 31st fell on the weekend. The actual deadline is January 31st unless this is the case.
If you miss the deadline for issuing 1099s, you may face a fine from $50 to $270 per form - depending on how late you've issued it. As mentioned, if you don't issue one at all, you could face a hefty penalty or an IRS audit.
What happens if I file a 1099 form for a contractor that doesn't need one?
The good news is that while you may face penalties for issuing 1099s late or not at all, this rule doesn't apply if the form is unnecessary. If you issue a 1099 to a contractor or freelancer who doesn't need to file one, the IRS will not penalize you for it. The IRS considers this an "extra" form, and it shouldn't affect your own business' filings. However, there is a penalty for filing a 1099 late.
Do you have to send a 1099 to a Limited Liability Company?
If the entity or person you're doing business with is taxed as a corporation, you do not need to issue that LLC a 1099-MISC.
Some businesses may go ahead and issue 1099s for all their contractors, regardless of whether or not they need to. But, if you've hired and paid money to more than one or two LLCs over the course of a year, this can become a lot of extra work.
You're better off asking contractors directly, giving them a W-9 to fill out, or working with a tax and accounting software like Hello Bonsai to clarify if you need one.
Disclaimer: Tax rules frequently change and are highly specific to your situation. Please consult a qualified tax professional.