If you made payments to an independent contractor during the tax year, you must send a 1099 to the individual to report the payment. However, you may wonder do S-corps get a 1099, and if so, under what circumstances?
Get into the details of Form 1099, learn how and when to file, and take notice of critical exceptions so you can confidently approach tax season.
There are several types of 1099 forms, but the most common are:
1099-DIV: For those who own shares of stock or mutual funds that pay dividends.
1099-INT: For interest on savings, checking, or other bank accounts.
1099-R: For income from retirement plans, pensions, IRAs, annuities, and insurance contracts.
1099-MISC: For work as an independent contractor.
1099-NEC: For non-employee compensation.
Do You Have to Send 1099s to an S-Corporation?
Form 1099 is a document that reports income from sources other than employment, such as interest, dividends, or self-employment earnings. The IRS only requires 1099s for business services. You do not have to submit one for personal services.
You do not need to send 1099s to an S-Corporation. This step is not required because S-Corporations are pass-through entities, meaning the business’s income is reported on the owners’ individual tax returns.
You should still send Form 1099 to single-member limited liability companies (LLC) or single-person limited corporations (Ltd.) unless they have elected S-Corporation or C-Corporation status.
You must pay a fee for each 1099 you submit late or intentionally disregard. In 2022, the maximum penalty is $570 for each deliberately ignored 1099. If you file late, you will either pay $50, $110, or $280, depending on how late you submitted the tax form and whether the action was intentional.
If you’re unsure whether you need to send a 1099, consult an experienced accountant or tax attorney who can help you with your business taxes.
Do S Corps Get a 1099?: The Exceptions
An LLC will receive a 1099 if it is a sole proprietorship or a multi-member LLC taxed as a partnership. If the LLC has filed as an S-corporation, it will not need to file a 1099.
Despite having S-corporation status, there are a few types of payments that require a form 1099:
- Attorney fees (even if the lawyer is incorporated)
- Payments to medical providers
- Payments made in lieu of tax-exempt interest or dividends
For example, if you hire an attorney to oversee a settlement agreement and pay the attorney more than $600 for these legal services, you will need to report it in Box 1 of Form 1099-NEC, under section 6041A(a)(1).
When Am I Required to Issue a 1099?
The IRS requires a business to issue a form 1099 to each contractor who received at least $600 in payment during the tax year. This may include payments for services, rent, prizes and awards, and other forms of income.
Failure to issue a 1099 when required can result in hefty fines. In most cases, contractors must complete a form W-9 before starting a project, so the business owner has the details they need to issue a 1099 for the calendar year.
1. What was the purpose of the payment?
Form 1099 payments are meant to categorize expenses a business or trade pays for products or services over $600. Personal expenses of any amount do not require a form 1099 to be filled out. In other words, if you spend $600 or more on a product or service that will benefit your business, you will need to issue a 1099.
For example, hiring a cleaning service to tidy your office space would count as a business payment and require you to submit Form 1099. However, hiring a cleaning service to clean your home is a personal expense and does not require form 1099.
2. Who were you paying?
You do not have to report certain payments on Form 1099, although they may still be taxable to the recipient. You are not required to submit Form 1099 for the following payments:
- Payments to a C- or S-corporation or entity operating as a C- or S-corporation (exceptions listed above, e.g., for medical or attorney expenses)
- Costs for telephone, freight, merchandise, storage, and other similar items
- Rent payments to property managers or real estate agents
- Employee wages
- Business travel allowances
- Life insurance
- Payments to tax-exempt organizations and trusts
- Payments to homeowners from the HFA (or similar state program)
- Compensation for injury or sickness by D.O.J.
- Compensation for wrongful incarceration
3. What was the method of payment?
If you hire a contractor to perform work for your business, you only need to submit 1099 if you pay them using cash or check. You do not need to prepare Form 1099 for contractor payments made with a credit card, debit card, store-valued card, or mobile wallet like PayPal.
This is because the payment settlement entity (credit card company) is responsible for reporting qualifying e-payments to vendors or contractors on separate Form 1099-K, Payment Card, and Third Party Network Transactions.
4. What was the payment amount?
You must file Form 1099-MISC for each person you have paid at least $600 for business reasons, or $10 in royalties, during that year.
This amount includes rent, prizes, medical payments, other income payments, fishing boat proceeds, crop insurance, nonqualified deferred compensation, and Section 409A deferrals.
The $600 limit can be reached over multiple payments in a given year.
For instance, paying a painter $500 to do a job in March means you would not have to file form 1099 that year. But, if you pay the painter $500 in March and then ask him to do an additional $200 job in October, you will have exceeded the $600 limit and must submit Form 1099.
When Am I Not Required to Issue a 1099?
Under certain conditions, you are not required to issue a 1099. 1099s are filed for business expenses, not personal payments.
The amount you pay for a service will also determine if you are required to file a form 1099. If you pay someone less than $600 in a year for services, you do not have to issue 1099.
1. Personal payments
You do not need to issue form 1099 for payments made for personal reasons. For example, if you hire someone to paint your office’s breakroom, you would submit form 1099. Hiring someone to paint your home’s kitchen is considered a personal expense and does not require Form 1099.
Additionally, you can exclude any business payments you make with a credit card, debit card, or via a payment platform called a third-party settlement organization, like PayPal or Venmo, on Form 1099. Card issuers and third-party payment networks are responsible for reporting these payments on Form 1099-K.
2. Payments to corporations
Most payments you make to a corporation (including to LLCs treated as C-corps or S-corps) do not have to be reported on form 1099. However, you must report the following payments made to corporations on form 1099:
- Medical payments (Box 6)
- Gross proceeds paid to a lawyer (Box 10)
- Purchase of fish for resale (Box 11)
- Substitute payments instead of dividends or tax-exempt interest (Box 8)
For example, if you pay an attorney to oversee a legal settlement, you still must issue a 1099 even if that attorney is incorporated.
3. Payments of less than $600
If you hire someone to provide a service for your business but spend less than $600 in payments, you do not have to issue a 1099. However, if you pay someone at least $10 in royalties or broker payments (in lieu of tax-exempt interest or dividends), you must issue form 1099.
4. Payments to freelancers hired through third-party services
You are not required to submit a 1099 if you hire a freelancer through a third-party service.
Third-party services include companies that supply freelancers, such as graphic designers and e-book ghostwriters like Upwork, Fiverr, and Designhill. Since third-party services are payment settlement entities, they are responsible for Form 1099, not you.
For example, you can hire a freelance writer from a third-party platform like Upwork to write content for your company’s website. However, even if you pay the freelancer more than $600 for their services, you do not have to issue them a 1099.
5. Employee business expense reimbursements
You do not have to report employee business travel allowances on form 1099. You can report payments made to employees as wages on Form W-2 under a nonaccountable plan.
Payments you make to your employee under an accountable plan are not reported on Form W-2 unless you give your employee a per diem or mileage allowance.
6. Foreign workers
Form 1099 has a FATCA (Foreign Account Tax Compliance Act) checkbox you must check if:
How to Check if a Contractor is a Corporation?
It is crucial to determine whether your contractor is operating as a corporation because that will determine if you need to file Form 1099. Although most contractors have their EIN on documentation like invoices, it is not mandatory. You can use the EIN to identify businesses, including LLCs and some sole proprietors.
If you want to determine if your contractor is a corporation, you can take the following steps:
1. Search for the contractor’s business name in your state’s business registry
By law, corporations must register with the State where the company incorporates. The Secretary of State’s website should have the names of any owners and members.
2. Use online national directories
Several services offer paid search functions that can look through various databases.
The National Corporation Directory is one of these companies with a search engine that queries multiple state databases to find out information about a company and its officers.
3. Check the Better Business Bureau
The Better Business Bureau (BBB) has several searchable databases that can also assist you in determining the ownership of corporations.
For example, suppose you hired a janitorial service registered in South Carolina to clean your business premises. In that case, you access the South Carolina Secretary of State’s Business Entities Online website and follow their prompts.
You can try the BBB databases if you don’t know where the business was incorporated.
If you still can’t be sure, you can check other Secretary of State websites or use a paid, multi-search tool.
The search results using these tools should provide you with a complete list of registered businesses containing the name you searched, including information on the date of incorporation, entity type, entity status, and incorporated state.
Form 1099-MISC vs. Form 1099-NEC
Two of the most common forms you may need to fill out are the 1099-MISC and the 1099-NEC.
The 1099-MISC is used to report miscellaneous income. This is money you’ve earned that doesn’t fall into another category. Earnings can include rental income, royalties, or income from competition winnings.
The 1099-NEC is used for nonemployee compensation; in other words, the money you’ve earned for services rendered but aren’t considered an employee of the company. This could include payments for freelance work, consulting services, or other similar services.
If you’re unsure which form to use, it’s best to use the 1099-MISC or schedule a consultation with a tax accountant. However, if you’re confident that your reporting income falls into the nonemployee compensation category, then you can use the 1099-NEC.
The main difference between the two forms is that 1099-MISC can be used for various income types, while 1099-NEC can only be used for income from services rendered. For example, 1099-MISC can be used to report rent payments, royalties, or prizes, while 1099-NEC can only be used to report income from freelance work or consulting services.
Because 1099-NEC is a more specific form, it is preferred over 1099-MISC.
Distinguishing Between Employee and Contractor
When running a business, it’s important to classify your workers correctly. A 1099 form is for a contractor, while employees get W-2 forms. Incorrectly classifying a worker can have consequences, including fines and penalties.
Workers classified as employees are entitled to certain benefits and protections under the law, such as the minimum wage, overtime pay, unemployment insurance, and workers’ compensation.
Contractors do not enjoy these benefits but are not bound by the same commitments, such as set working days and hours. While employees receive a salary or hourly wage, contractors are paid per project.
If a worker is not free to work for another company, they are probably an employee. Many employees must fill out non-compete clauses when signing on with a company, while freelancers are under no obligation to work under a single employer.
You can also look at an employee’s specific job description. If an employee is doing work that seems central to the business or making significant decisions on a company’s behalf, they are probably an employee.
Penalties for Late Filings of 1099 Forms
The Internal Revenue Service imposes penalties on entities that file 1099 forms late. The IRS assesses a penalty of $50 per form up to 30 days late. Any longer than 30 days and before August 1st is $110 per form. After August 1st or an unfiled form results in a penalty of $280 per violation.
If the IRS can show that the late filing was due to willful neglect, the penalty increases to $560 per form for the 2021 tax year or $570 per form for the 2022 tax year. Penalties are assessed based on the number of late forms, not the amount of taxes owed. This can result in significant penalties for multiple late filings.
What Information Do I Need to Complete a 1099?
It is vital to ensure that all the information you enter on your 1099 form is accurate. To complete a 1099, you will need:
- Your Social Security number or tax ID number
- The name and address of the payer
- The amount of money paid during the year
- The date of payment
How to Fill Out 1099-MISC or 1099-NEC
The form you use depends on the type of payment you’re making. If you’re paying for services, you’ll use the 1099-MISC form. If you’re paying for goods, you’ll use the 1099-NEC form. When filling out these forms, you’ll need to provide:
- Your business name and address
- The contractor or non-employees name and address
- The amount of money paid
- The date of payment
- The type of payment (services or goods)
The process for filling out a 1099-MISC or 1099-NEC form is similar to other 1099 forms. Enter your name, address, and taxpayer identification number (TIN) at the top of the form. You can find this information on the W-9 form turned in to you by the contractor.
Enter the recipient’s name and address on the 1099 form and the funds you paid in the appropriate box. After you complete the form, mail it to the recipient so they can file it with their tax return.
For example, if you hire a landscaping company to plant trees around your workplace, you are purchasing a service and must fill out Form 1099-MISC.
You will enter your information (name, address, TIN) on the top half of the form (the “payer” section) and the landscaping company’s information on the bottom half (the “recipient” section).
After checking your form for errors, you can mail it to the landscaping company so they can file it with their tax return.
How to Send 1099 Forms
When you produce a 1099-NEC form, you must provide copies to different recipients.
Here’s where each copy should go:
- Copy A: submit to the IRS along with Form 1096
- Copy 1: send to your state’s department of revenue
- Copy B: send to the recipient (the contractor)
- Copy C: keep for your records
1. Sending 1099s to a Contractor
When sending a 1099 to a contractor, you can use multiple methods. You can mail the completed 1099 to the contractor using the United States Postal Service. If you’re worried about them not receiving the form, you can send it through certified mail to ensure it arrives at its destination.
You can also use secure email or a payment platform like Bill.com that allows the contractor to view and download the form when needed.
2. Filing a Copy with the IRS
You can file your 1099 with your taxes using one of two methods: paper filing or electronic filing. To paper file, attach the 1099 to your tax return and mail it to the address listed on the form.
You will need to submit the 1099 electronically along with your tax return for electronic filing.
2a. Mailing a Copy to the IRS
Choosing between mailing a physical copy and using the IRS’s electronic platform to submit your 1099 depends on your personal preference.
Many taxpayers find electronic filing faster and more convenient than traditional paper filing, though some prefer the tangibility of a physical copy.
You are currently unable to file Forms 1099-QA and 5498-QA electronically.
Mailing copy to IRS using these instructions
To file a 1099, you must complete Form 1096 and attach it to Form 1099-MISC. Mail both forms to the IRS at the address specified on Form 1096. Ensure you include a copy of Form 1099-MISC for each person or entity from which you received payments.
2b. Sending a Copy Electronically through the IRS FIRE System
The IRS actively encourages businesses to file their forms electronically through the IRS FIRE system. If you have more than 250 of one type of form, then the FIRE system is required, but even small businesses with less than 250 forms are still encouraged to use the system.
- To start, you need to go to the IRS website and go to the section for the FIRE system. Once there, click to log on and click the link to “create a new account.” Follow the instructions until you successfully create an account in the IRS FIRE system.
- Once you have created an account, go back to the log-on page and log in. You will be brought to the system bulletin page. Click on the main menu page and then click send information returns.
- The next screen will ask you for your Transmitter’s Control Code (TCC), a number given to you by the IRS after filing an IR application. Enter the code, click submit, then verify the information on the next screen and hit accept.
- After verifying the information, click the original file and select browse or choose file, depending on your browser. Find the file you want to upload from your computer, select it, and click open. Once opened, click upload, and the file will be uploaded through the IRS FIRE system.
Deadlines for Issuing 1099 Forms
The deadline for issuing 1099 forms to recipients is January 31st. Any business that fails to comply with this deadline may be penalized. However, if an employer can show that they made a good faith effort to comply with the deadline, they may be able to avoid penalties.
Here are the answers to some common questions about S-Corporations getting 1099s to report on their tax return.
Corporations are not considered to be self-employed individuals for tax purposes. This means that corporations are not responsible for paying taxes on their own income and are ineligible to receive a 1099 form.
1099s submitted to an S-corporation can be voided by submitting a corrected form. On the corrected form, put an “X” in the corrected box and fill out the money amounts with zeroes.
The minimum payment amount that requires a 1099 filing is $600. This is true for any type of payment, including rent, services, royalties, and other types of income.
While there is no specific penalty for sending a 1099 to an S-corporation, it’s vital to ensure that you correctly classify your business activities. Failure to do so could result in underreporting your income and paying back taxes, interest and penalties.
The IRS also receives a copy for every 1099 sent to you. If you do not report the 1099 income, the IRS will not have matching records, so yes, the IRS will eventually notice and enquire about the difference in tax returns.