Does an LLC Taxed as an S Corp Get a 1099?

Understanding tax forms and classifications is important for small businesses. Business owners often have questions about how LLCs and S corporations interact with 1099 reporting requirements. This article clarifies the relationship between LLCs taxed as S-corps and 1099 reporting, explaining when these entities might receive or issue such forms.

Understanding 1099 Forms

Form 1099 is a tax document used by the IRS to report income other than wages, salaries, and tips, which are reported on Form W-2. These forms document payments from an individual or business to a non-employee. Businesses generate 1099s and send copies to both the recipient and the IRS.

Several Form 1099 variations exist for specific financial transactions. Form 1099-NEC reports nonemployee compensation, such as payments to independent contractors, totaling $600 or more annually. Form 1099-MISC covers miscellaneous income like rents, royalties, or prizes, also for payments of $600 or more. Other types include Form 1099-INT for interest income of at least $10, and Form 1099-DIV for dividends of $10 or more.

The LLC and S Corporation Tax Election

A Limited Liability Company (LLC) is a flexible business structure providing liability protection to its owners, called members. By default, a single-member LLC is taxed as a disregarded entity, with income and expenses reported on the owner’s personal tax return, like a sole proprietorship. A multi-member LLC is taxed as a partnership, with profits and losses passing through to members’ individual tax returns.

An LLC can elect to be taxed as an S corporation for federal income tax purposes by filing Form 2553 with the IRS. S-corp status allows the business’s income, losses, deductions, and credits to pass through directly to shareholders’ personal tax returns, avoiding the double taxation of traditional corporations. S-corps require shareholder-employees to be paid a reasonable salary for services, which is subject to payroll taxes.

1099 Reporting for LLCs Taxed as S Corporations

When an LLC elects S corporation taxation, its 1099 reporting obligations and receipts change. Generally, an S-corp does not receive a Form 1099-NEC for services provided to clients. This is due to a “corporate exemption” rule, which exempts payments to corporations from 1099-NEC reporting, as the IRS assumes corporations have their own accounting and reporting.

Despite the general exemption for service-related 1099-NECs, an S-corp can still receive other 1099 forms. For instance, an S-corp may receive Form 1099-INT for interest earned on business bank accounts, or Form 1099-DIV for dividends from investments. Certain payments, even to a corporation, are exceptions to the corporate exemption and must be reported on a 1099-MISC. This includes payments for legal services and medical or healthcare payments totaling $600 or more.

Conversely, an LLC taxed as an S-corp must issue 1099 forms. An S-corp must issue 1099 forms to independent contractors, vendors, or individuals it pays for services, rents, or other reportable payments if thresholds are met. For example, if an S-corp pays an unincorporated independent contractor $600 or more for services annually, it must issue a Form 1099-NEC. S-corps should collect a completed Form W-9 from each vendor to determine their tax classification and if a 1099 is required.

Tax Implications and Compliance

Income earned by an LLC taxed as an S-corp flows through to shareholders, regardless of 1099 reporting. This income, along with losses, deductions, and credits, is reported on the S-corp’s tax return, Form 1120-S. Each shareholder receives a Schedule K-1 detailing their proportional share of the S-corp’s income or loss. Shareholders report this flow-through income on their personal tax returns, Form 1040, at their individual tax rates.

Accurate record-keeping helps S-corps ensure tax compliance. This includes tracking all income and expenses, regardless of whether a 1099 was issued or received. The reasonable salary paid to an S-corp owner is reported on a Form W-2, with payroll taxes withheld. Accounting for all income on the corporate tax return and flowing it through to owners’ personal returns helps maintain compliance and avoid penalties.