Does a Limited Liability S Corporation Get a 1099?
Understand 1099 tax form implications for an LLC taxed as an S corporation, covering reporting duties for payments made and income received.
When forming a business, owners often consider structures offering flexibility and tax advantages. A Limited Liability Company (LLC) is a popular choice, providing personal liability protection similar to a corporation. An LLC can elect to be taxed as an S corporation, meaning it retains its legal LLC structure but follows S corporation tax rules for federal purposes. This election impacts how the business handles tax forms, including whether it issues or receives 1099 forms. This article clarifies the role of 1099 forms for LLCs taxed as S corporations, covering both issuance obligations and receipt circumstances.
Understanding 1099 Forms
Form 1099 is a series of tax documents used by the Internal Revenue Service (IRS) to report various types of income paid to non-employees. These informational returns document payments that typically do not have taxes withheld, unlike wages reported on a Form W-2. The payer, whether an individual or a business, is responsible for issuing these forms to the payee and the IRS. This system helps the IRS ensure that all taxable income is accurately reported.
Multiple variants of the 1099 form exist for specific income types. For instance, Form 1099-NEC (Nonemployee Compensation) reports payments for services performed by independent contractors. Form 1099-MISC (Miscellaneous Information) covers other income, such as rents, royalties, and prizes. Form 1099-K (Payment Card and Third Party Network Transactions) reports payments processed through credit card networks or third-party payment processors.
When a Business Issues 1099s
An S corporation, like any other business, must issue 1099 forms for certain payments made in its trade or business. These obligations primarily apply to payments made to non-employees for services or other specific income types. The most common scenario involves payments to independent contractors. If an S corporation pays an unincorporated independent contractor $600 or more in a calendar year for services, it generally must issue Form 1099-NEC.
An S corporation may also need to issue Form 1099-MISC for other payments, such as rent payments of $600 or more to a non-corporate landlord, or royalty payments exceeding $10. A key exception exists for payments made to corporations. Generally, businesses are not required to issue 1099 forms for payments made to C corporations, and this exemption often extends to S corporations for most payment types.
When an S Corporation Receives 1099s
The general rule is that payments made to corporations, including S corporations, are generally exempt from 1099 reporting requirements. This means if an S corporation provides services or receives income that would normally trigger a 1099 for an individual, the payer is usually not required to issue a 1099 to the S corporation. The IRS assumes corporations have robust internal accounting, making third-party 1099s less critical for income verification.
Despite this general exemption, an S corporation might still receive a 1099 in specific situations. Payments for legal services are one exception; $600 or more paid to an attorney must be reported on a 1099 form, typically Form 1099-NEC or 1099-MISC. Certain royalty payments may also require a 1099.
Additionally, payments processed through payment card networks and third-party network transactions, like those from PayPal or Stripe, are reported on Form 1099-K. This form does not have a corporate exemption, so an S corporation will receive a 1099-K if it meets reporting thresholds, such as over $5,000 in aggregated payments for goods/services for the 2024 tax year. All income earned by an S corporation must be reported on its tax return, regardless of whether a 1099 form was received.
S Corporation Income Reporting
An S corporation operates as a pass-through entity for tax purposes. This means the business itself does not typically pay federal income tax. Instead, its income, deductions, losses, and credits are “passed through” to its shareholders, who then report their share of the business’s financial activity on their individual tax returns. This structure helps avoid the double taxation that can occur with C corporations, where profits are taxed at the corporate level and again when distributed to shareholders.
The primary tax form used by an S corporation to report its financial results to the IRS is Form 1120-S, U.S. Income Tax Return for an S Corporation. All business income, regardless of whether it was reported on a 1099 form, must be included on this return.
As part of filing Form 1120-S, the S corporation prepares a Schedule K-1 (Form 1120-S) for each shareholder. This Schedule K-1 details each shareholder’s proportional share of the S corporation’s income, losses, deductions, and credits. Shareholders then use the information from their Schedule K-1 to complete their personal income tax returns, Form 1040. The absence of a 1099 form does not reduce the S corporation’s obligation to accurately report all its income and financial activities through Form 1120-S and the corresponding Schedule K-1s.