Do LLCs get 1099’s During Tax Time?
A common question that tax and accounting professional receive all the time is “do LLCs get 1099’s?”
Many small business owners, freelancers, and independent contractors choose to form their business as a Limited Liability Company rather than a Sole Proprietorship or C Corporation, and for good reason.
A Limited Liability Company (LLC) provides a great deal of legal protection to the owner(s) of the LLC.
In order to answer the question “do LLCs get 1099’s?”, we need to first understand the LLC basics.
What is an LLC?
An LLC is a type of business structure that you choose when you first form your business.
Common business structures include: sole proprietorship, partnership, LLC, S Corporation, C Corporation, and Non Profit.
There are three main reasons a business owner might chose an LLC over other business structures:
- They are fairly easy to form and maintain with less restrictions than other business structures like C corporations
- Protects business owners from being personally liable for the company’s debts or other liabilities
- LLCs qualify for pass-through taxation meaning that profits are passed through to the owner(s) and only taxed once as individual income tax
That being said, there are actually a few different ways that an LLC can be structured and this depends on the number of owner(s) or members as well as whether the LLC has chosen to elect as an S Corporation.
The three most common types of LLCs are: Single-member LLCs, Multi-Member LLCs, and S Corporations and each one will determine how you file your taxes.
Single Member LLC
A single member LLC is exactly what the name suggests: an LLC with only one member – the owner.
Single member LLCs are also sometimes referred to as “disregarded entities”.
So if a single member LLC is just a business owned by a single person, why not just be a sole proprietor?
Sole proprietorships do not provide the liability protection that an LLC does.
When someone forms a sole proprietorship, they are saying that the business assets and personal assets are one in the same, there is no distinction between the two.
If a sole proprietorship business were to be sued, both the owners business and personal assets are at risk.
If the same business owners chooses to form his business as an LLC, he is saying that his personal and business assets are completely separate entities.
Therefore, if there are issues with the business, his personal assets are protected.
Single member LLCs report their income, expenses and any business activities on Form Schedule C on an individual personal tax return.
LLC net in come reported on the Schedule C is subject to self-employment tax.
Multi-member LLCs are essentially businesses owned by more than one person, or in other words, a co-ownership of a limited liability company.
Multi-Member LLCs give each member limited liability protection as discussed above – the personal assets and business assets are treated as separate entities and therefore, personal assets are protected should the business owe money, etc.
For tax purposes, the IRS views Multi-Member LLC’s the same as Partnerships, so you will file Form 1065, which is a partnership tax return.
Net income will pass through to the members of the LLC and they will report it on their personal individual income tax returns, linked to their own SSN’s.
This happens so that income can be divided amongst more than one taxpayer.
S Corporations are a little more tricky and are mainly setup for tax purposes.
S Corporations are said to be the best business setup for income tax purposes, but they certainly have their nuances.
When an owners(s) become an employee of the S Corporation, the tax liability is split between them and the company.
In a nutshell, S Corporations pay their owner(s) as if they were employees and these employees can also take dividends, free of self-employment tax.
Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.
I won’t dive too deep into S Corporations because they are pretty intricate, but if you want to learn more, you can read all about S Corporations in our article here.
LLCs and 1099’s
Now let’s answer the original question: do LLC’s get 1099 forms?
The answer is both yes and no, in other words – it depends!
If an LLC is a Sole Proprietorship, or Multi-member LLC that is taxed as a partnership, they would absolutely need to receive a 1099-MISC or 1099-NEC
An LLC that is an S Corporation does not need to receive a 1099 form.
However, there are a few specific types of payments made to corporations by your business, including payments to S Corporations, which would require you to report the payment on an S Corporation 1099:
- Box 6: Medical and health care payments
- Box 8: Substitute payments in lieu of dividends or tax-exempt interest
- Box 10: Gross proceeds paid to an attorney
The only way to know if a company needs to receive a 1099 for their services is to have them complete a W-9 Form.
The W-9 form is a “Request for Taxpayer Identification and Certification” document that tells you what type of business structure the business has, it even has a check box for S corporations:
As a general rule, it is wise to have a new vendor complete a W-9 form as part of the new vendor process.
This will ensure you don’t miss any 1099’s and are covered should your LLC be audited by the IRS.
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