How do LLCs use 1099 Forms?
Two types of workers may be hired by a LLC – employees and independent contractors. Form 1099-MISC for independent contractors is the equivalent of the W-2 form that employees receive every year. Form 1099-MISC is used by LLCs to report any income over $600.00 paid to independent contractors as a requirement by the IRS. Independent contractors are commonly hired by LLCs due to long term cost savings and less oversight required.
If a LLC hires a contractor and pays them over $600.00 during the year, Form 1099 must be issued to the contractor by January 31 of the following year. Some taxpayers are granted a little extra time, up to February 16th, to mail the form to the contractor. Sometimes employers send 1099s late, however late 1099 reporting may be penalized by the IRS unless there is a reasonable cause, so most employers will try to file them by the 31st of January.
Form 1099-MISC will show the income that the contractor received during the year, but there are no taxes withheld from that income. This is because independent contractors are required to pay their own taxes. If a contractor does not pay their taxes, or if they pay an incorrect amount, they are likely to be audited by the IRS at some point. LLCs should submit a W-9 form to their independent contractors at the beginning of their work. The W-9 form lists the contractor’s most recent address, business name, and EIN for tax purposes. The W-9 is kept on file for 1099 issuing and for the LLC’s records. LLCs should hire independent contractors who have the proper business structure in place for tax purposes.
The IRS should receive a copy of any 1099 forms that are sent to contractors. The LLC or employer has until the end of February to send a copy of the 1099 to the IRS, and if the forms are filed electronically the due date is extended to March 31. Generally there is a brief time delay between the time that a 1099 form is issued to an employee, and the time that it is sent to the IRS, which allows for any errors to be corrected. For instance, if a contractor received an incorrect income amount on his or her 1099 form, then the employer should be notified as quickly as possible so that there are no inconsistencies. Amended 1099 forms can be submitted to the IRS as well if an incorrect form was already submitted.
The IRS uses a matching system to check if the 1099 issued to them matches the reported income on the contractor’s tax return. This is to ensure that income LLCs or other businesses pay to contractors is taxed. Therefore it is very important for contractors to accurately report their 1099 income on their tax returns to avoid a potential audit. If there is a discrepancy that could not be worked out with the employer or 1099 issuer, it must be explained on the tax return. Independent contractors should also make sure to maintain an updated address with their clients to ensure that 1099 forms arrive on time.
by 
Erich J. Ruth
Erich J. Ruth provides technical support for National Software which is the parent company for 1099FIRE. 1099FIRE develops and markets a comprehensive range of products that enables any size of business or institution to effectively manage and comply with year-end filing requirements. 1099FIRE is an employee-owned company located in Phoenix, Arizona.
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