Do Attorneys Get a 1099 If They Are a Corporation?
Does your business need to issue a 1099-NEC to an attorney? Learn the specific IRS reporting rules, even for corporate law firms.
Accurate tax reporting is essential for businesses to ensure compliance with federal regulations and avoid penalties. Businesses frequently engage independent contractors, necessitating proper reporting of payments for these services. Understanding the specific requirements for information returns, such as Form 1099-NEC, helps businesses track expenditures and fulfill their reporting obligations.
Basics of Form 1099-NEC and Payments for Services
Form 1099-NEC, or Nonemployee Compensation, is an IRS information return used by businesses to report payments of $600 or more made to non-employees for services performed in the course of a trade or business during a calendar year. The payer is responsible for issuing this form to the recipient and filing it with the IRS by January 31st of the year following the payment.
Nonemployee compensation includes fees, commissions, prizes, and awards for services. For instance, if a business pays a graphic designer $700 for a project, that payment would generally be reported on Form 1099-NEC. Even if a business withholds federal income tax from nonemployee payments, a 1099-NEC must still be filed, regardless of the $600 threshold.
The General Corporate Exemption from Form 1099-NEC
Generally, payments made to corporations for services are exempt from Form 1099-NEC reporting. The IRS recognizes that corporations have their own comprehensive reporting requirements to the federal government, reducing the need for the payer to issue an additional information return. For example, a payment to a large, incorporated consulting firm for general business advice would typically not require a 1099-NEC.
This general rule applies to most types of services, meaning that a business usually does not need to issue a 1099-NEC to a vendor that operates as a C corporation or an S corporation. However, specific exceptions exist depending on the nature of the service provided.
Specific Rules for Payments to Attorneys
Payments for legal services represent a notable exception to the general corporate exemption for Form 1099-NEC reporting. Businesses must report payments of $600 or more made to attorneys for legal services on Form 1099-NEC, even if the attorney operates as a corporation. This includes fees for litigation, consulting, and other professional legal services. The IRS mandates this reporting to track payments associated with legal proceedings and ensure proper income reporting.
Beyond direct legal fees, businesses may also need to report “gross proceeds paid to an attorney.” These are typically reported in Box 10 of Form 1099-MISC. This applies when an attorney receives a settlement or award on behalf of a client, and the attorney is merely a conduit for the funds. For example, an insurance company paying a settlement to an attorney on behalf of a claimant would report the gross amount in Box 10 of Form 1099-MISC, while the attorney’s fees would be reported on Form 1099-NEC.
How to Determine an Attorney’s Business Structure
To determine whether to issue a Form 1099-NEC to an attorney, a business owner should request a completed IRS Form W-9, “Request for Taxpayer Identification Number and Certification,” from the attorney or their firm. This form provides information about the attorney’s legal and tax structure. The attorney must promptly provide their Taxpayer Identification Number (TIN) on the W-9.
On Form W-9, the attorney will indicate their federal tax classification by checking a designated box. Businesses should look for the “Federal tax classification” section, noting whether the attorney has checked “C Corporation” or “S Corporation.” If the attorney fails to provide a W-9, or if the information is incorrect, the payer may be required to initiate backup withholding at a rate of 24% on future payments. This ensures the IRS receives potential tax revenue from unreported income.