Does an LLC Need a 1099? - MarketWatch (2024)

A 1099 is a collection of official tax forms used to document when a business makes a payment to someone that isn’t an employee. It’s used by the IRS to make sure everyone is reporting the correct amount on their individual tax returns.

The IRS generally requires you to file a 1099 to record business involving a disregarded entity. Disregarded entities don’t pay business taxes. Instead, all of the business’s income flows directly to the owner of the entity, who must then claim it as their own for income tax purposes. A 1099 ensures all taxable income is accounted for. Businesses that aren’t disregarded entities (e.g C-corporations) don’t have to file 1099s because they’re already subject to strict state and federal reporting requirements which make 1099 reporting redundant.

For instance, if you’re making payments to a sole proprietorship or a partnership, you’ll be required to file a 1099 to record these transactions since they’re disregarded entities. However, if the business you’re paying is a C-corp, you likely don’t need a 1099 for the reasons explained in the previous section.

LLCs can be trickier to determine whether a 1099 is needed because they don’t all receive the same tax treatment. For example, a single-member LLC is taxed like a sole proprietorship, so you’ll be required to file a 1099 when doing business with one. However, an LLC that elects S-corp tax status is subject to corporate reporting requirements, so filing a 1099 is unnecessary.

Aside from the type of business entity that you’re paying, you’ll also need to make sure the payment you made is the type that requires a 1099. As a general rule, any payment that exceeds $600 in a calendar year to a non-employee necessitates a 1099. If your business paid a sole proprietor $500 for a service, you won’t need to record it with a 1099 since it’s below the $600 threshold.

Not all businesses are required to file 1099s. These businesses are subject to more strict reporting and filing requirements than disregarded entities. This makes filing a 1099 unnecessary since the IRS already has that information without a 1099 form. Absent any exception (e.g., medical or substitute payments), the IRS doesn’t require you to send a 1099 to:

• S-corporations
• C-corporations
• LLCs that elected S-corp tax status

If you’re ever unsure whether the business entity you’re paying is exempt from 1099 filing, you can ask them to fill in form W-9, which is a “Request for Taxpayer Identification Number and Certification”. A W-9 form will contain the business’s information to help you determine whether a 1099 is necessary, such as the type of business structure they have. It will also provide you with the information needed to fill out a 1099, such as the taxpayer identification number (TIN). This number will either be the employer identification number they obtained for their business, or the business owner’s Social Security number.

You’ll use a 1099-NEC form when you’re paying someone that isn’t a W-2 employee of your business. This includes freelancers providing a service, vendors providing a good and any other cause for payment that is likely subject to a self-employment tax.

Most often, the non-employee that requires this form is an independent contractor. An independent contractor is someone that’s been hired to do work for a business, but can’t be considered an employee because they’re self-employed and therefore retain some right to control how their work is done. This small distinction will lead to different tax implications, which is why independent contractors must file a different type of tax form — Form 1099.

Form 1099-NEC will typically include:

• Your business name, details and TIN
• Amount you paid or received from the non-employee
• Amount of tax you withheld (if any)
• The other business’s name, details, business type and tax ID number

If you own stock that pays a dividend or if you receive a capital gains distribution from a mutual fund, you’ll report this income to the IRS using the form 1099-DIV. Although you won’t actually file this form with the IRS, you’ll still need the information it reports when preparing your tax return.

You can file all of your 1099s directly with the IRS by using the forms available on the IRS website. You’ll also have to send a copy of the form to the business that you’re filing it for.