The 1099 rules are different for individuals and corporations. Here’s what you need to know.
Table of Contents
This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.
The first step to answering do S-Corps get a 1099 is reviewing the requirements for getting or issuing a 1099. Both Form 1099-NEC and 1099-K could be in play.
There are three main situations where businesses have to issue Form 1099-NEC:
Independent contractors earning $600 or more in gross proceeds during the calendar year for services performed.
Payments to an attorney, such as attorney’s fees, of $600 or more during the calendar year.
Sales totaling $5,000 or more of consumer products to a person on a buy-sell, a deposit-commission, or other commission basis for resale.
According to the Internal Revenue Service instructions, Form 1099-NEC is for trade or business purposes only. For example, if you hire someone to work on your personal house, you generally don’t need to issue a Form 1099-NEC. Personal payments may be subject to other reporting, such as the nanny tax.
Another important thing to note in the instructions is where it says “reportable payments to corporations.” Those payments are (1) payments to attorneys, which is why they’re split off from independent contractors, and (2) certain payments by federal government executive agencies.
Other payments to corporations are not reportable payments.
One other thing to note in the exceptions section is the reference to Form 1099-K. Payments reportable on Form 1099-K don’t go on Form 1099-NEC. This keeps them from being double-reported.
Form 1099-K is a tax form issued by third-party payment networks. This includes payment services like Square, PayPal, and Venmo.
The current 1099-K rules say that you get a 1099-K if you receive $600 or more in business payments during the year. There is no longer a minimum number of transactions.
Unlike Form 1099-NEC, the Form 1099-K instructions don’t include who does and doesn’t get a 1099-K. That’s because everyone who gets paid the minimum amount gets a 1099-K.
There is no exception for corporations, so corporations get a 1099-K.
So do I 1099 an S-Corp?
If you’re a business that issues 1099-NECs, you usually won’t 1099 an S-corp. If you’re a payment processor that issues 1099-Ks, you’ll usually need to.
C-Corporations vs. S-Corporations vs. Independent Contractors
Next, why is it important if S-corporations get a 1099? Is it for tax evasion or for some other reason?
While some people might try to avoid 1099s to evade taxes, there may be tax benefits to forming an S-corporation or other business structure.
If you’re an independent contractor with no formal business entity, you’re a sole proprietorship for income tax purposes. You report your business income and expenses on Schedule C of your individual tax return.
Your net profits from your business are included as part of your personal income. You pay your ordinary income tax rate plus 15.3% in self-employment taxes.
S-corporations are a special tax tool. To be an S-corporation, you need to already have a Limited Liability Company (LLC) or corporation. You then fill out a form saying you want to be taxed as an S-corporation.
The advantage to an S-Corporation is that you can split your earnings into salary and distributions (dividends). You pay your ordinary income tax rate on all of your earnings, but you only pay self-employment taxes on your wages.
This is not a blank check to make all of your earnings distributions or dividends to avoid self-employment tax. You have to take reasonable compensation as salary.
Reasonable compensation depends on factors like your type of work and whether you have people working for you. A single-member LLC or other solo service provider generally needs to take a much higher percentage of their earnings as salary compared to the owner of a manufacturing plant with multiple employees.
You also need to consider the costs of creating and maintaining your S-corporation to the potential tax savings. Most states charge initial filing fees and annual renewal fees. You may also need to hire a registered agent, open a separate business checking account with monthly fees, or hire a lawyer to make sure you’re doing everything correctly.
C-corporations are usually a bad idea as a tax savings tool, especially at lower income levels. They’re usually only used by large companies that don’t qualify for S-corporation status or who are seeking investors.
The reason C-corporations are usually a bad idea for taxes is double taxation. Unlike S-corporations, a C-corporation has to file a separate tax return.
The corporation has to pay 21% in federal income taxes plus state income taxes of up to 12% depending on the state. Note: A Limited Liability Company classified as an S-corporation for taxes generally isn’t subject to state corporate income taxes.
When you take money out of the corporation, you still have to pay personal income taxes, including a total of 15.3% in employer and employee FICA taxes on your salary. There is a chance a C-corporation can come out ahead if you can classify most of your distributions as a qualified dividend subject to a 0% to 20% personal income tax rate.
You may want to ask a Certified Public Accountant if a C-corporation could be right for you.
How to Get Paid as an S-Corporation
If you want to get paid as an S-Corporation and not receive a 1099, you have to be contracted under your Limited Liability Company or corporation. You can’t sign a contract as an individual and then say don’t give me a 1099.
The process is usually relatively simple. When you sign a contract, use your business name, not your personal name. Many people with a corporation or LLC use Inc., Corp., or LLC in their business name to avoid confusion.
The trick is that some businesses may not want to work with a corporation or LLC. If they refuse to, there’s generally not much you can do except decide if you want to work with them as an individual.
Some businesses don’t have an onboarding process that’s designed for S-corporations. There may be an online form that only asks for personal information. In that case, you’ll need to contact that business to see how you can contract with them as an S-Corporation.
What if you’re an S-corporation and a business pays you as an individual?
If you’re an S-corporation and get a check made out to you personally, it can complicate your taxes. You don’t want their accountant to decide you have to get a personal 1099-NEC or the IRS to decide the income isn’t S-corporation income.
In many cases, you’ll want to ask the business to reissue the payment made out to your business name. If you have a single member LLC that’s Your Name, LLC, it might be safe to deposit a check made out to Your Name in your LLC bank account. However, you still want to make sure the business recognizes that you’re contracted as an LLC.
What if a business incorrectly issues you a 1099 when you’re a corporation?
If you receive a 1099-NEC that includes your corporation’s name and EIN, you generally don’t need to do anything. Even though corporations generally don’t get a 1099-NEC, you still have to report that income.
If you receive a 1099-NEC or 1099-K in your individual name when you’re contracted as a corporation, the best thing to do is usually to ask the business to withdraw or correct the 1099.
If they don’t correct the 1099, keep records such as
Your agreement with the business showing you’re contracted as a corporation or LLC
Your bank deposit records showing you deposited the payment into your business bank account
Any correspondence with the business asking them to correct the issue
File your taxes according to what you believe is correct. That may be including the income in your S-corporation’s income and not adding personal 1099 income to your tax return.
If the IRS sends you a CP2000 notice or other tax notice saying you didn’t report your income correctly, send a written explanation of what happened and where you reported your income.
How to Know Your Contractor is a Corporation or LLC
Businesses can receive large fines for not issuing 1099s when they’re supposed to. If someone tells you not to issue 1099 for non-employee compensation, you want to make sure they’re right.
The first thing to do is to make sure that your contract is with the corporation or LLC not the individual. If one of your contractors forms a corporation or LLC after they’ve already been working for, you’ll need to sign a new contract.
Note: For mid-year changes, you’ll generally need to issue an individual 1099-NEC for income they received before they were contracted as a corporation or LLC.
If you want to make sure someone actually has a corporation or LLC and isn’t just saying they’re Contractor, LLC, you can check online. Most states have a public database of businesses that you can usually find on the Secretary of State’s website (for your state, not the federal Secretary of State).
If they’re an LLC, you also need to verify their tax status. Your 1099 filing requirements depend on whether the LLC is taxed or S-corporation.
You can’t search whether someone is an S-corporation online. You can ask for a copy of either their Form 2253 or CP261 Notice. Form 2253 is the form a business uses to make its tax election. Notice CP261 is the approval letter from the IRS.
It’s generally safer to get a copy of the CP261 Notice since the IRS may not approve Form 2253 (it’s rare but can happen for technical reasons), or the business owner may not have actually filed it. Whichever you get, keep a copy in your records just like you would a W-9, W-4, or other tax documents.
Filing Taxes as an S-Corporation
If you choose to become an S-corporation, you’ll generally need to file both an individual tax return and a Form 1120-S S-Corporation tax return. You can file Form 1120-S using tax software, or you may want someone else to do your taxes for you.