All entrepreneurs aim to do all they can to keep the IRS happy and file taxes correctly.
If you have recently started a business and chosen an LLC as your business entity, you may be wondering what will happen at tax time. Should you expect a 1099? The answer is – it depends. Whether you get a 1099 depends on how you’ve chosen to have your LLC taxed. You also may need to issue 1099s.
What Is a 1099?
A 1099 is a US tax form that reports money or benefits paid to independent contractors, subcontractors, or a person or company that has provided services, or a person or company to whom you owe money for services.
It’s used to calculate taxable income for the person who received money or benefits and record expenses for the company that paid the money or benefits. As a business owner, you have to issue 1099s for any contractors to whom you paid more than $600 during the relevant fiscal year.
How LLCs Are Taxed
An LLC is considered a “pass-through” entity, which means income passes through the business to the owner’s personal account for tax purposes. The LLC is not a taxable entity, so all income is reported on the returns of the owner or owners and taxed at their rates. Since 2017, LLC owners may be eligible for the 20% pass-through deduction as part of the Tax Cuts and Jobs Act, so you may want to check if you qualify.
Yet an LLC can choose to be taxed as a corporation or partnership if its owners deem such a move beneficial. In terms of taxation, the corporation itself is taxed as are shareholder dividends, which is sometimes referred to as double taxation.
A multi-member LLC must file form 1065 with the IRS, which is the U.S. Return of Partnership Income. Attached to this will be K-1 forms for each member showing their share of the business income.
Keep in mind, if you are a single-member LLC taxed as a sole proprietorship or a multi-member LLC taxed as a partnership and provide services to another company as an independent contractor, that company will issue you a 1099 reporting the amount your company has been paid.
If you have elected to be taxed as a corporation, with either S or C status, you will not receive a 1099. But you will of course have to report the income. In an S-Corporation, income passes through directly to shareholders, without that income being taxed as corporate income. This means an S-Corporation is not responsible for corporate taxes, but rather is taxed like a partnership. A partnership tax return is filed for information purposes only, and income is reported on members’ personal tax returns.
In a C-Corporation, meanwhile, the business pays taxes on the business income and shareholders pay taxes on dividends. Income is reported on a corporate tax return and dividends are reported on the shareholders’ personal tax returns.
If your LLC is taxed as a corporation and members receive money from the business in the form of dividends, members should be issued 1099-DIV. This form is to report the dividend income received.
The LLC is expected to issue the 1099-DIVs to members and send copies to the IRS. Members also submit copies with their personal tax returns.
You will also be responsible for issuing 1099s if you pay for services from independent contractors operating as sole proprietors or non-corporation LLCs (single-member LLCs and LLCs taxed as a partnership need 1099s). Corporations or LLCs taxed as corporations do not receive 1099s.
But how do you know their tax status? All independent contractors you hire must fill out a W-9 form, which is the “Request for Taxpayer Identification Number and Certification”.
There is a box on the form that the contractor has to check to specify their tax status. If they check the LLC box, they also have to check a box to indicate if they are taxed as an S Corp or C Corp. Unless they have indicated S Corp or C Corp status, you must issue that contractor a 1099.
Nobody likes paying taxes, but it is of course unavoidable. If you file wrong or fail to file, the consequences can be considerable. So it’s highly recommended that you have an accountant help you with your taxes. They can advise you when to issue 1099s and when you should expect to receive them, and ensure you report all your income and expenses correctly. When you are trying to grow your business, the last thing you need is an audit or tax problem to slow you down. The help of tax pros can free you to focus on what you do best — growing your business!