Do S Corps Get 1099s? Rules and Exceptions

Businesses frequently engage independent contractors for various services. To ensure income reporting compliance, the Internal Revenue Service (IRS) mandates information returns like Form 1099-NEC. This form reports payments for services rendered by non-employees. Understanding the requirements for issuing these forms can be intricate, particularly with different business structures, such as S corporations.

Understanding Form 1099-NEC

Form 1099-NEC, or Nonemployee Compensation, is an IRS tax document designed to report payments made in the course of a trade or business to individuals or entities who are not employees. This includes payments for services to independent contractors, freelancers, and consultants. Businesses are generally required to issue Form 1099-NEC if they pay an individual or unincorporated entity $600 or more for services during a calendar year.

This form helps the IRS track income earned outside of traditional employment relationships. The business making the payment, known as the payer, is responsible for completing and sending this form. The recipient then uses the information on Form 1099-NEC to accurately report their income on their tax return, often on Schedule C.

The Corporate Exemption Rule

Businesses are generally not required to issue Form 1099-NEC for payments made to corporations for services, due to a corporate exemption rule established by the IRS. S corporations are classified as corporations for tax purposes.

This exemption means that payments totaling $600 or more to an S corporation for services typically do not necessitate a Form 1099-NEC. The rationale is that corporations, including S corporations, have their own tax reporting obligations to the IRS. For instance, S corporations file Form 1120-S, which provides the IRS with information about their income and distributions.

Situations Requiring a 1099 for S Corps

While S corporations generally benefit from the corporate exemption, specific circumstances require a Form 1099-NEC or other 1099 forms. These exceptions ensure compliance with IRS regulations. One notable exception involves payments for medical and health care services, which typically require reporting regardless of the recipient’s corporate status.

Payments made to attorneys for legal services also fall under an exception, meaning a Form 1099-NEC is generally required even if the legal firm is structured as an S corporation. This rule applies irrespective of whether the law firm is a sole proprietorship, partnership, LLC, or corporation. Additionally, substitute payments made in lieu of dividends or tax-exempt interest may necessitate reporting on a Form 1099-MISC, even if the recipient is a corporation. Another specific exception includes cash payments for the purchase of fish for resale, which are reported on Form 1099-NEC.

Distinguishing S Corps from Other Business Structures for 1099 Purposes

Understanding the tax classification of a business is important for determining 1099 reporting requirements, especially when an entity is legally structured as a Limited Liability Company (LLC). An LLC’s tax treatment dictates whether it is subject to 1099 reporting, not merely its legal formation. When an LLC elects to be taxed as an S corporation, it is generally treated as a corporation for 1099 purposes, meaning payments to it typically fall under the corporate exemption.

Conversely, an LLC that is taxed as a sole proprietorship or a partnership would generally receive a Form 1099-NEC for services rendered if the payment threshold is met. This distinction highlights the importance of obtaining a completed Form W-9 from any vendor or contractor before making payments. The W-9 provides the payer with the necessary tax classification information, including the payee’s Taxpayer Identification Number (TIN), for proper 1099 reporting.