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.
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.
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.
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.
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.
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.
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:
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.
Try a test run of Bonsai's Tax & tax software for freelancers here.
Have more questions about 1099 forms and LLCs? Here are some questions that people also ask about this topic.
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.
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.
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.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?