What You Need to Know About 1099’s
as an S-Corp Owner
Electing to be an S-Corp provides a ton of benefits to you, the business owner. And it also raises the bar for what you’re required to do as a business owner. The IRS cares very much how money moves in and out of the business, and so they mandate that you report this to them, and also notify whoever is on the other side of the transaction (aka, the vendor or independent contractor) that you’re reporting this expense to the IRS. How do they do this? It’s all through 1009’s
1099s are informational returns used to report various types of income to the IRS. 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). 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 the 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 the Form 1099-QA which reports distributions from ABLE accounts. We’ll focus on the two most common forms rather than overwhelm you with an exhaustive list.
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 a statement, with no maximum, if a business intentionally disregards the requirement to provide payee statements. One of the services we provide here at Formations is ensuring that you are fulfilling your reporting obligations on time.
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 number, 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 to $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.
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1099-NEC’s and 1099-MISC’s 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.
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.
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.
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.
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 during the year:
- At least $600 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.
Understanding what payments are reportable and which form to use, as well as meeting the filing deadlines can seem overwhelming. Your success team here at Formations is here to help so give us a call today. If you are not currently a Formations customer, schedule a free consultation now! We are here to help!