Any business owner is interested in ensuring that taxes are clean, simple, and, more importantly, lower. However, with S Corporations and 1099 forms, one may find it a bit tricky. Many independent contractors and self-employed people are asking themselves: Do S Corps get 1099s? Is it worth issuing one to my S Corp supplier? And what about its impact on my taxes?
This is the truth: S Corporations have a special position in the U.S. regarding taxation. They enable company owners to be in a position to avoid paying tax twice, and at the same time take advantage of corporate benefits. However, simultaneously, IRS reporting requirements of 1099 forms may become confusing with the introduction of S Corps. Any lapse in one of the forms or lack of understanding of an exemption may attract undesired IRS scrutiny or fines.
This step-by-step guide will also discuss the tax implications of 1099 forms in the S Corps, when they are required, when they are not, and what both the payer and S Corp owners should know to continue being compliant. You will also find out the exceptions, the pitfalls, and the best tax planning that can ensure your business is audit-free and also makes the best tax deductions.
At the conclusion of this blog, you will have a crystal-clear picture of the effect of 1099s on S Corporations how to deal with them with ease every tax year.
Understanding the S Corporation Structure
First, explain what an S Corp is, how it is taxed, and why this is important to 1099 reporting. An S Corp is a corporation that has chosen under the Internal Revenue Code to be a pass-through corporation. The income, losses, deductions, and credits are passed across to the shareholders, and they reflect the same in their individual tax returns.
Here are the key benefits:
- Eliminates the cases of two taxation (corporation level + shareholder dividend level) that a typical C-Corp would go through.
- The profits may be distributed to shareholders as a salary (W-2) and subsequently as distributions (non-W-2), which have tax-planning implications.
- The S Corp is required to submit the Form 1120-S on an annual basis, although with zero income.
- Every shareholder is provided with a Schedule K-1 that reflects his or her share of items.
- The stock and debt of each shareholder of the S Corp should be subject to tracking (this influences distributions and losses).
- Due to this pass-through format, the IRS and tax experts treat the issuing and receipt of 1099s differently in the case of S Corps.
What are Forms 1099?
The number 1099 can be simplified into 1099-NEC, 1099-MISC, 1099-INT, etc. These are information returns used to report various types of income to the IRS and payees.
A few quick essentials:
- Most business dealings require that, in any given calendar year, when you pay an independent contractor (non-employee) a sum of at least $600 in cash, you are usually required to file a Form 1099-NEC (non-employee compensation).
- The payer has to obtain a Form W-9 from the payee to identify the classification (individual, sole proprietor, corporation, S Corp, etc).
- The Purpose: IRS intends to reconcile what payees report on their tax returns and payers with what they expect to report. When the IRS notices that there is a mismatch, it creates a red flag.
Why this is important: In the case of an S corp, mismanagement of 1099s is equivalent to not issuing the 1099s when there should be (penalties may be imposed, and the deduction can no longer be deductible) or issuing incorrectly (audit risk, confusion, or unjustified extra work). Also, 1099 vs W-2 wage differences are significant tax implications to S Corp shareholders/employees.
When an S Corp Must Issue 1099s to Others
Although S Corps are exempted in some aspects (which we will discuss below), they are, at any rate, payers in most situations and required to file 1099s in accordance with the normal regulations.
- The General Rule
An S Corp should issue a non-employee (i.e., an independent contractor, freelancer, landlord, etc) 1099-NEC or other 1099 in case during a calendar year the S Corp pays the non-employee more than 600 in a calendar year as a service (or any other type of reportable income).
- W-9 Obtain and Check Classification
During the onboarding of a vendor, take the Form W-9. On the W-9, check the box that shows whether or not the payee is a corporation (C or S), and you can be exempt in most cases.
- Exceptions Apply Even if the Vendor is a Corporation
There are 1099s are needed when the corporation is the payee. For example:
- The legal fee being paid to an attorney, even in the case that one is incorporated into a law firm, will be subject to reporting.
- Numbers could be 1099-MISC, which is required when payments are made to medical or healthcare service providers (for-profit).
- Why is it important for S Corp Payors?
In case your S Corp does not file a necessary 1099:
- You can be deprived of the deduction of that payment.
- You can pay a penalty for IRS information returns (dollar amounts per form for late/missing filings).
Therefore, in the case of any S Corp that employs contractors, freelancers, and/or rents, etc., the question is whether we should issue any 1099s. The question should be posed once a year.
Do S Corps Receive 1099s? The General Rule and Exceptions
And now let us turn the coin: do we have an S Corp receiving a Form 1099 at any time?
- The General Exemption
In general terms, the payment to corporations (including S Corps) will not result in the issuance of a payer 1099. Since the recipient (the corporation) already reports income through its return (Form 1120-S) and shareholders receive K-1s, the IRS would expect that it is already adequately reported.
As an example, when a sole proprietor or other party engages your S Corp to provide consultation and pays your S Corp $10 000, they would not typically issue a 1099 if you submitted a W-9 that was an S-Corp.
Major Exceptions when an S Corp Must Receive a 1099
This is essential that there are exceptions to the rule in which the payer is obliged to file a 1099, even to a corporation (including S Corps):
- Legal services payments: Any payment to you of legal services (probably, even when incorporated) may require the payer to send you a Form 1099-NEC or 1099-MISC.
- Medical/health-care service providers (for-profit): Once again, payers may have to file 1099-MISC.
- Replacement of tax-exempt interests or dividends.
- There is also a scenario in which the payer can wrongly categorize you as a non-corporate or you received services through a disregarded entity, and, therefore, the payer files a 1099 unwillingly or with due caution (not harmful in itself).
Why is this important to the S Corp recipient?
If your S Corp is issued a 1099 where none was needed (or ought to have been needed):
- It could also elicit additional IRS scrutiny: why did you get a 1099 since corporations are not supposed to get one?
- It can mean that the payer did not request or depend on a valid W-9, a compliance problem.
- Under your view, you still have to report the income – the 1099 does not alter your tax treatment, merely includes an information return.
Summing up: though the exemption will reduce the number of 1099s to check, you should be conscious of exceptions to ensure that you do not overlook an exception that you are supposed to have.
Common Mistakes & Dangerous Pitfalls for S Corps Regarding 1099s
These are a few of the most common mistakes S Corps make in the 1099 area and the price you can pay because of it.
- Paying yourself (a shareholder‐employee) via 1099
As has been mentioned, this is nearly always a red flag. It might appear that you are making yourself an independent contractor of your own S Corp. Risk: IRS re-characterization of payments as W-2 wages, back payroll tax, interest, penalties.
- Failing to Issue the Required 1099s
You may think we are a corporation, and we are not required to worry about 1099s. However, you still have to file 1099s on payments to non-corporate vendors. Not doing so: you will lose the deduction of the expense and pay penalties.
- Failure to Get a W-9 or Vendor Classification
A W-9 is not required and may not allow you to know whether the payee is an S-Corp or C-Corp, or individual, and whether a 1099 form is required. And you might fail to have backup withholding records, which may attract penalties.
- Assuming S Corps never get 1099s
However, they may be given one, in case of legal services, medical services, or other exemptions. Disregarding such a possibility could lead to mismatches, audit triggers, or unreported income.
- Misclassifying a Vendor
In some cases, a vendor is an LLC owned as an S Corp (or as a C-Corp), or as a disregarded entity. Failing to correctly classify their status and failing to issue a necessary 1099 (or issue when the issue is not necessary), you are inviting a penalty or inquiry.
- Late filing of 1099s or incorrect forms
Fines on late/Missing, or inaccurate 1099 filings may be cumulative. Although precise amounts vary depending on their lateness, intentionality, and so on, they exist.
Conclusion: Keep Your 1099 and S Corp Tax Game Strong
The tax requirements on S Corps, as far as 1099s are concerned, do not need to be daunting. The most important point is the following: although the majority of the S Corporations do not receive 1099s, some payments, such as legal services and medical services, do make them receive a 1099 form.
When you are an S Corp, keeping a clear record by keeping on top of your 1099 obligations is a way to avoid a rough audit and full compliance with the rules of the IRS. On the other hand, when paying the vendors, you should be sure that they are taxpayers before deciding on whether to file a 1099 1, since a single failure to file will attract penalties.
To the point, 1099s are not your enemy; they are your partner in ensuring transparency in finance. Good record keeping, good accounting programs (or outsource the stuff), and you will be sailing through the tax season without having to worry.
Pro Tip: Seek the advice of a tax expert. Even a few words with a consultant can usually cost you a lot less than a late filing penalty would.
