May 9, 2023
What You Need to Know About 1099s as an S-Corp Owner
As an S-Corp owner, it is crucial to navigate the intricacies of tax requirements, including the filing of 1099 forms. This article provides essential insights into 1099 reporting, highlighting its significance, the recipients involved, and the necessary steps for accurate completion.
Whether you're an experienced S-Corp owner or considering forming one, understanding 1099 forms is vital to maintain compliance, avoid penalties, and foster positive relationships with contractors and service providers.
Common Types of 1099 Forms
There are more than twenty variations of the 1099 form, each designed to capture a specific type of income. For example, a 1099-A is for reporting the acquisition or abandonment of secured property, and a 1099-S is for reporting proceeds from real estate transactions, such as the sale of a personal residence.
Some of these forms are common, such as the 1099-INT, which financial institutions use to report interest. Others are rare and situationally specific, such as Form 1099-QA which reports distributions from ABLE accounts.
Some common 1099 forms include:
- 1099-MISC: This form is used to report miscellaneous income of $600 or more paid to individuals or unincorporated businesses, such as freelancers, independent contractors, and service providers.
- 1099-INT: This form is used to report interest income of $10 or more paid to individuals or businesses, typically from sources like bank accounts, loans, or investment accounts.
- 1099-DIV: This form is used to report dividend income of $10 or more paid to individuals or businesses who hold stocks, mutual funds, or other investments that generate dividends.
- 1099-B: This form is used to report proceeds from broker and barter exchange transactions. It includes information about sales of stocks, bonds, mutual funds, and other securities.
- 1099-R: This form is used to report distributions from pensions, retirement accounts, annuities, and similar retirement plans.
- 1099-K: This form is used to report payments received by individuals or businesses through third-party payment processors, such as online platforms or merchant services, when the total payments exceed specific thresholds.
In this article, we’ll focus on the two most common forms: Form 1099-MISC and Form 1099-NEC.
1099 Forms in Focus
What are 1099 forms?
1099s are informational returns used to report various types of income to the IRS. And that’s all they are – a way to report income (if you’re the recipient of funds) and expenses (if you’re paying the funds).
Issuing 1099’s is Not Optional!
It is important to understand that issuing 1099’s is mandatory and has financial penalties if you fail to do so. Failure to file these forms can result in penalties by the IRS which can range from $50 to $110 per form. There is a minimum penalty of $550 per statement, with no maximum, if a business intentionally disregards the requirement to provide payee statements.
First Step: Form W9
Preparing 1099’s starts with gathering the right info. Each vendor or independent contractor should fill out a Form W-9 Request for Taxpayer Identification Number and Certification. This form will provide you with the info needed to prepare the 1099’s, including individual or business name, address, and identifying numbers, such as a Social Security Number (SSN) or Employer Identification Number (EIN). You will keep the W-9 as part of your company records.
Form 1099-MISC and Form 1099-NEC
The two most common forms are Form 1099-MISC and Form 1099-NEC. You can probably guess what the “MISC” stands for (and here’s a hint if you can’t: MISC are the first four letters of the word “Miscellaneous”). In legalese, “a Form 1099-MISC reports direct sales of at least $5,000 in consumer products to a buyer anywhere other than a permanent retail establishment. And if you withhold federal income taxes using the backup withholding rules you would issue a 1099-MISC, regardless of the total payment amount.” Basically, report payments made to independent contractors for services on Form 1099-NEC (Non-Employee Compensation). Form 1099-MISC (Miscellaneous Income) reports rents, royalties, and other income.
Form 1099-NEC is a new form that the IRS released in 2020, and it’s a variation of the 1099-MISC that reports Non-Employee Compensation (or NEC). This includes anything paid to an individual or business for services. And not just any services, they must be part of your normal trade or business and must total $600 or more (for the entire year). For example, if you’re a real estate agent and paid to have a house staged, you’ll issue a 1099-NEC to the Staging Company.
Form 1099-MISC must be delivered to the recipient by the end of January, but you have a bit longer to get the forms to the IRS (last day of February if you are mailing paper forms, or March 31st if filing electronically). If the due date falls on a weekend or holiday it becomes due on the next regular business day. Form 1099-NEC must be delivered to the recipient and the IRS on or before January 31st regardless of whether you file on paper or electronically. Along with the submission of the 1099 forms, you must provide the IRS with a Form 1096 Annual Summary and Transmittal of U.S. Information Returns.
1099-NECs and 1099-MISCs are generally not issued to corporations, whether they are traditional C-Corporations or Subchapter S-Corporations, with few exceptions. Corporations would receive a 1099-NEC for payments made for fish purchases, attorney’s fees, or by a federal executive agency for services. Gross proceeds for legal services are reportable to corporations with a Form 1099-MISC.
Who Gets a 1099 Form
Exceptions for 1099
Many business owners have questions about 1099 forms and what the requirements are for issuing them. A key point to remember is that you issue the forms to report payments you made for services, not for a good, a product, or a membership. The service must be part of your normal business operations. You will not issue a 1099 for payments made for personal purposes.
Payments to Corporations
Another important exception to issuing a 1099 is for those vendors and contractors that you pay through third-party networks, like via Credit Card or through PayPal (which is one of the reasons we always recommend that S-Corp owners use a business credit card or business debit card). The IRS defines PayPal as a payment settlement entity (PSE) with special reporting requirements. PSEs issue a Form 1099-K to any business or individual when they reach certain thresholds. These thresholds are currently set for payments exceeding $20,000 and at least 200 transactions in a year.
Payments Less than $600
You do not need to issue a 1099-NEC to these vendors regardless of whether they meet the PSE thresholds. However, other common cash payment applications, such as Venmo, Facebook Money, or Google Wallet, do not meet the IRS definition of a PSE. So payments made to independent contractors through these platforms would require you to issue a 1099 if you paid more than $600 in a calendar year.
Payments to Freelancers Hired through Third-Party Services
If you hire freelancers through third-party services, such as online platforms or marketplace websites, you generally do not need to issue them a 1099-MISC. The responsibility for issuing 1099-MISC forms to these freelancers typically falls on the third-party service provider.
Who Should Your S-Corp Issue a Form 1099 to?
You should issue a Form 1099-MISC to each person or business that you have paid at least $600 during the year in:
- Prizes and awards
- Other income payments
- Medical and health care payments
- Crop insurance proceeds
- Cash payments for fish and other aquatic life you purchased from anyone in the trade or business of catching fish.
- The cash paid from a notional principal contract to an individual, partnership, or estate.
- Payments made to an attorney.
- Any fishing boat proceeds.
At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest
What about Foreign Vendors?
For foreign vendors, there are specific reporting requirements based on international tax treaties and laws. It depends on whether the foreign contractor is a U.S. taxpayer and if the services performed were within the U.S. or outside the country. Generally, you will request that a foreign vendor complete a Form W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting. This certifies that the foreign contractor is not a U.S. taxpayer. Certain foreign vendors must report U.S. sourced income, which could require the issuance of a Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. Reporting requirements for foreign vendors can be complex. Reach out to the staff here at Formations so we can help you better understand your reporting obligations in this situation.
How to File 1099 Forms
Information You Need to Complete a 1099 Form
To complete a 1099 form accurately, you will need the following information:
- Payer Information: This includes your name, address, and taxpayer identification number (TIN), which can be your Social Security Number (SSN) or Employer Identification Number (EIN).
- Recipient Information: You need the name, address, and taxpayer identification number (SSN or EIN) of the person or entity receiving the payment. Ensure that the recipient's information is accurate and matches the records they have provided.
- Payment Details: You should provide the total amount paid to the recipient during the tax year. This includes both cash and non-cash payments, such as services rendered, rent, royalties, or other forms of income. Ensure you accurately report the payments in the appropriate boxes on the specific 1099 form.
- Form Specific Information: Depending on the type of 1099 form you are completing, there may be additional information required. For example, if you are using a 1099-MISC form, you may need to provide details such as the recipient's occupation or the state where the services were performed.
How to Submit a 1099 Form
- Copy Distribution: Provide a copy of the completed 1099 form to the recipient (the person or entity who received the payment). The deadline for distributing the 1099 form to recipients is typically January 31st of the year following the tax year in which the payments were made.
- IRS Filing: File the 1099 forms with the Internal Revenue Service (IRS). This involves submitting the appropriate copies of the 1099 forms along with a Form 1096, which serves as a summary of all the 1099 forms being filed. The filing deadline for most 1099 forms is February 28th if filing by paper or March 31st if filing electronically. Note that the deadlines may vary, so it's essential to verify the specific deadline for the tax year you're filing.
- State Filing: In addition to the IRS, you may also need to file the 1099 forms with your state tax agency, depending on the state's requirements. Some states have separate filing requirements, deadlines, and forms specifically for reporting 1099 information. Check with your state's tax agency to determine if you need to file 1099 forms with them.
Deadlines for Issuing 1099 Forms
The deadline for issuing 1099 forms to recipients is typically January 31st of the year following the tax year in which the payments were made. However, if January 31st falls on a weekend or a legal holiday, the deadline is usually extended to the next business day.
Here are the specific deadlines for issuing 1099 forms to recipients:
- 1099-MISC: If you are reporting non-employee compensation in Box 7 of Form 1099-MISC, the deadline to provide the form to recipients is January 31st.
- Other 1099 Forms: For other types of 1099 forms, such as 1099-INT, 1099-DIV, or 1099-B, the deadline for providing the forms to recipients is also January 31st.
Penalties for Late Filings of 1099 Forms
The penalties for failure to furnish a correct 1099 form to the vendor can vary depending on the circumstances and the length of the delay. The penalties can be as follows:
- $50 per 1099 form: If you file the correct 1099 form within 30 days after the due date (by March 30th for electronic filing), the penalty is $50 per form.
- $110 per 1099 form: If you file the correct 1099 form more than 30 days after the due date but before August 1st, the penalty increases to $110 per form.
- $280 per 1099 form: If you file the correct 1099 form on or after August 1st, or you do not file the required 1099 forms at all, the penalty further increases to $280 per form.
It's important to note that these penalty amounts are subject to change, and the IRS may provide specific instructions or penalty relief in certain cases. The penalties mentioned here are for failure to furnish correct information returns (including 1099 forms) under section 6722 of the Internal Revenue Code.
Frequently Asked Questions
Why don’t corporations get a 1099?
Corporations, including C-Corporations and S-Corporations, do not typically receive 1099 forms for payments they receive because they are considered separate legal entities. The purpose of issuing 1099 forms is to report income paid to individuals, partnerships, and certain other entities that are not classified as corporations.
What happens if you send a 1099 to an S-corporation by mistake?
Here are the steps you can take to resolve the situation:
- Contact the recipient: Reach out to the S-Corporation and explain the mistake. Inform them that they should disregard the 1099 form as it was sent in error. It's essential to communicate promptly and clearly to avoid any confusion or potential issues.
- Correct the reporting with the IRS: If you have already filed the 1099 form with the IRS, you may need to file an amended return to correct the error. In this case, you should file Form 1096, along with a corrected Form 1099, to provide accurate information to the IRS. Be sure to indicate that it is a corrected form and explain the reason for the correction.
- Retain documentation: Keep a record of your communication with the S-Corporation regarding the mistake and any corrected forms or amended returns that you filed with the IRS. This documentation will serve as evidence of your effort to rectify the error if there are any inquiries or audits in the future.
What is the minimum payment amount to have to file a 1099?
You are required to file a 1099-MISC form if you make payments of $600 or more in a calendar year to an individual or unincorporated business (such as a partnership or sole proprietorship) for services rendered. This threshold applies specifically to reporting non-employee compensation in Box 7 of Form 1099-MISC.
Will the IRS catch a missing 1099-NEC?
The IRS uses a matching system to compare the income reported on tax returns with the information reported on 1099 forms. If discrepancies are found, such as a missing 1099-NEC, it is possible that the IRS may notice the omission and initiate further inquiry or contact the taxpayer for clarification.
It's important to note that the IRS has increasingly been improving its data matching capabilities and enforcement efforts to identify discrepancies and ensure compliance. Failing to report income from a 1099-NEC could result in penalties, interest, or potential audits.
To ensure compliance with tax regulations and avoid any potential issues, it is best practice to accurately report all income, including income reported on 1099 forms, on your tax return.