Do LLCs get 1099 Copies? - Explained
Updated on November 01, 2023 - 10:30 AM by Admin, TaxBandits
Businesses often make payments to other businesses and individual taxpayers during the course of their operations. The IRS requires businesses to file 1099 forms, reporting the payments made to these entities/individuals at the end of each tax year.
Additionally, the IRS mandates that businesses (payers) distribute copies of the
1099 forms to their payment recipients (payees). This article will provide a closer look at how to handle the 1099 filing and distribution process when payments are made from your business to a Limited Liability Corporation (LLC).
In this article, we cover the following topics:
1. What is a Limited Liability Company (LLC)?
Limited Liability Companies are formed at the state level; therefore, it is important to note that regulations for LLCs will vary by the state in which they operate. An LLC is formed by one or more members who are the owners of the business.
An LLC is a hybrid between a partnership and a corporation, offering protection to its members from personal liability for the business's debts or liabilities. Concerning taxes, the IRS classifies an LLC as either a corporation or a partnership. In either case, the business is not directly taxed on its earnings. Instead, all profits and losses are passed through to the LLC's members, who then report them on their individual tax returns. The LLC itself can choose how it wishes to be treated by the IRS.
It is possible for an LLC to have only one member. In such cases, it is referred to as a single-member LLC. Even though the business is owned by a sole member, it is still considered a separate business entity distinct from the individual taxpayer who owns it.
2. Should an LLC receive 1099 Copies?
If your business makes payments to an LLC that are required to be reported to the IRS, you may need to file a 1099 and provide a copy to the LLC. However, there are specific circumstances in which you should not file a 1099 for the LLC. How you report the payment depends on how the LLC elects to be treated for tax purposes.
If the LLC has elected to be taxed by the IRS as a corporation, you are not required to file a 1099 Form for them or provide a copy. Because the LLC members are being taxed as shareholders, they won’t need a 1099.
However, if the LLC has elected to be treated as a partnership or is a single-member LLC, then you should file a 1099 and provide a copy to them.
If you are uncertain about whether to file a 1099 to report payments made to an LLC, it is advisable to file the 1099 and provide a copy. If the LLC is not required to report the information to the IRS on their personal income taxes, they won't. However, if the LLC is required to report the income, and you haven't issued or filed a 1099, you could be subject to penalties for failure to file.
This is the key takeaway: Filing a 1099 for an LLC that doesn't require it carries no negative tax consequence, whereas failing to file a required 1099 will result in penalties.
3. Common 1099 Forms that an LLC may receive.
The 1099 Series of IRS tax forms has many different forms. However, there are a few forms that an LLC is much more likely to encounter.
The Form 1099-NEC is used to report non-employee compensation payments of $600 or more to the IRS. Before the IRS reinstated the 1099-NEC for the 2020 tax year, non-employee compensation was reported in box 7 of the 1099-MISC. This is no longer the case.
If a business hired an LLC to provide freelance services for your business and paid the LLC more than $600 during the tax year, a 1099-NEC is required. For example, if your business hires a contracting business that is classified as an LLC to renovate your office space, and the bill for the construction is $1,000.
If the LLC elects to be taxed as a partnership, your business must file a 1099-NEC because the payment was more than $600. This is also the case if the contractor’s business is a single-member LLC. However, if the LLC elects to be taxed as a corporation, there is no obligation to file and furnish a copy of Form 1099-NEC.
The Form 1099-MISC form is used to report miscellaneous payments that are made in the course of doing business. Some of the most common examples of miscellaneous payments include:
- Fishing boat proceedings.
- Medical and Healthcare payments.
- Payments made instead of dividends or interest.
- Payments made to an attorney.
- Crop insurance proceedings.
- Cash is paid from a notional principal contract to an individual, partnership, or estate.
- Proceeds from the sale of $5,000 or more of consumer products for resale outside a permanent store.
If your business made payments of this nature to an LLC, you will only need to file a 1099-MISC and furnish a copy if the LLC elects to be taxed as a partnership or if it is a single-member LLC.
Here’s a simple example: a business buys $7,500 worth of products from a buyer that is an LLC ( but not a permanent retail establishment), this payment should be reported on 1099-MISC unless the LLC is taxed as a corporation.
Due to the new reporting thresholds for filing 1099-K for the 2023 tax year, many more businesses and individual taxpayers will receive copies of this form. All electronic payments of $600 or more will be reported by Payment Settlement Entities that facilitate them.
This means that payments facilitated by third-party payment processors, such as apps like PayPal and Venmo, debit cards, credit cards, and stored value cards, will be reported to the businesses and taxpayers that receive them.
When LLCs receive payments through electronic methods, they will receive a copy from the entity that processed the payment. They will report this information to the IRS based on their classification as a corporation, partnership, or single-member LLC."
4. What Information is Required to File 1099 Forms for an LLC?
To successfully file 1099 Form for a Limited Liability Company, your business will need certain tax information. Most important, you will need the LLC’s Taxpayer Identification Number (TIN). This may be an EIN or an SSN, depending on how the LLC is classified and taxed by the IRS.
Additionally, it is important to know the company’s address, legal name, and tax classification before filing a 1099. Failing to have this information can lead to filing 1099s that are rejected by the IRS or needing to file corrections later for inaccurate 1099 forms.
5. How is this Tax Information Collected from an LLC?
The IRS recommends that whenever your business engages in transactions with another business or individual, you should request a Form W-9. Form W-9 is the Request for Taxpayer Identification Number and Certification.
It's important to note that this is not an IRS tax form that is required to be filed. Instead, it is a document designed for businesses to collect essential tax information from each other. On this form, the vendor (your payee) provides their TIN, legal name, address, and tax classification.
This information is crucial for accurately filing 1099s at the end of the year. One of the most important aspects of collecting this information from an LLC is determining its tax classification. By requesting a W-9 form from the vendors you work with, you can ensure that you have their TIN and understand how the IRS classifies their business. This will inform you whether they are taxed as a partnership or corporation, helping you determine whether you need to file 1099 copies for the company or not.
6. E-file 1099 Forms Securely with TaxBandits
TaxBandits is an IRS-authorized e-file provider that offers streamlined solutions for requesting and collecting W-9s and e-filing 1099 forms with the IRS
The TaxBandits W-9 Manager simplifies the process of collecting and managing W-9 information. Simply enter your vendor’s email address to request their W-9. The vendor will receive a secure link via email to complete and e-sign their Form W-9. Once completed, you will have access to approve and store this information until it is time to file 1099 forms.
TaxBandits simplifies the 1099 e-filing process as well, allowing you to import information in bulk and file within minutes. Complete the compliance process by letting TaxBandits handle the distribution of your recipient copies, either by mail or through secure online delivery.