Do Software Companies Get a 1099 for Services?

Form 1099-NEC is a tax document that businesses use to report payments for services rendered by non-employees. It helps the Internal Revenue Service (IRS) track income earned by independent contractors and freelancers, ensuring proper tax reporting. Understanding its purpose is essential for both businesses making payments and individuals or entities receiving them, as it impacts compliance with federal tax regulations.

Understanding Form 1099-NEC

Form 1099-NEC, or Nonemployee Compensation, is an IRS tax form for businesses to report payments of $600 or more made to individuals or entities for services performed in the course of their trade or business. This form helps the IRS monitor income that is not subject to traditional W-2 employee wage withholding. Introduced in the 2020 tax year, the 1099-NEC effectively replaced Box 7 of Form 1099-MISC, which previously reported nonemployee compensation.

The 1099-NEC serves as an informational return, providing a clear record of payments made to independent contractors, freelancers, consultants, and other self-employed individuals. It details the total compensation paid, along with any federal or state income tax withheld, if applicable. Recipients use this form to accurately report their self-employment income on their tax returns, typically on Schedule C (Form 1040).

Who Must Issue Form 1099-NEC

Any business that pays an independent contractor, freelancer, or service provider $600 or more for services rendered during the tax year must issue Form 1099-NEC. This obligation applies to sole proprietors, partnerships, corporations, and Limited Liability Companies (LLCs). The payment must be for services performed in the course of the payer’s trade or business, distinguishing it from personal payments.

Common examples of services that necessitate issuing a 1099-NEC include legal services, accounting services, graphic design, writing, consulting, and software development services. If a business contracts with an independent software developer and pays them $600 or more in a calendar year, a 1099-NEC is required. The payer is responsible for sending Copy B of the 1099-NEC to the recipient and Copy A to the IRS by January 31st of the year following the payment. If this date falls on a weekend or holiday, the deadline shifts to the next business day.

Who Typically Receives Form 1099-NEC

Individuals, sole proprietors, and partnerships who provide services and receive $600 or more from a single payer will receive a 1099-NEC. This includes independent contractors, freelancers, and consultants who offer services like software development or IT consulting.

A key exception exists for payments made to C corporations and S corporations. Businesses are not required to issue a 1099-NEC for payments made to entities structured as C-Corps or S-Corps, even if the payment exceeds $600. A software company incorporated as a C-Corp or S-Corp will not receive a 1099-NEC for services rendered. The corporate exception is based on the recipient’s entity type, not the payer’s.

However, specific exceptions to the corporate reporting exclusion exist. Payments for medical and healthcare services, as well as legal services, must be reported on a 1099-NEC regardless of whether the recipient is a corporation. For example, if a business pays a law firm (even if incorporated) $600 or more for legal services, a 1099-NEC is still required.

Navigating Your Business Structure for 1099s

A software company’s legal structure influences whether it will receive a Form 1099-NEC for services rendered. The IRS rules differentiate based on how the business is legally organized and, in some cases, how it elects to be taxed.

Software developers operating as sole proprietorships or single-member LLCs that are “disregarded entities” are treated similarly to individuals. If they receive $600 or more for their services from a single payer, they will be issued a Form 1099-NEC.

Partnerships and LLCs taxed as partnerships are also subject to 1099-NEC reporting requirements. If a business pays a software company structured as a partnership or an LLC taxed as a partnership $600 or more for services, the payer must issue a 1099-NEC. These entity types do not fall under the corporate exception for 1099 reporting.

Conversely, if a software company is incorporated as a C corporation or an S corporation, it falls under the corporate exception. Payments for services made to these entities are not required to be reported on a 1099-NEC. If an LLC has elected to be taxed as an S corporation or a C corporation, it also benefits from this corporate exception and will not receive a 1099-NEC.

Next Steps for Businesses

For businesses that engage independent contractors, requesting a completed Form W-9 from all service providers is a critical first step. This form provides essential information such as the contractor’s legal name, business name, federal tax classification, and Taxpayer Identification Number (TIN). The W-9 allows the payer to determine if a 1099-NEC is required or if the corporate exception applies, preventing potential compliance issues. Businesses must also ensure they file Copy A of the 1099-NEC with the IRS and furnish Copy B to the recipient by the January 31st deadline of the year following the payments.

For software companies acting as recipients, especially those structured as sole proprietorships, partnerships, or LLCs not taxed as corporations, expecting and tracking 1099-NECs is important. These forms are necessary to accurately report all income on their tax returns, typically using Schedule C. Even if a 1099-NEC is not received when expected, or if it contains incorrect information, the recipient is still responsible for reporting all earned income.

For incorporated software companies (C-Corps or S-Corps) that generally do not receive 1099-NEC forms, the responsibility to report all income remains. While these entities are typically exempt from receiving the form, they must still maintain accurate records of all revenue for their corporate tax filings, such as Form 1120-S for S corporations. Regardless of whether a 1099-NEC is issued or received, meticulous record-keeping of all business transactions is essential for accurate tax compliance and to avoid penalties.