As a business owner of an S corporation, it is important to develop a solid understanding of the tax advantages, rules, and regulations in order to operate successfully. Depending on the nature of the business, S corporation owners may wonder which tax forms are required when they have to report their annual income. One such tax form that is relatively well-known among individual taxpayers is Form 1099, but business owners must handle this form differently. In this guide, learn whether or not your S corporation may be required to issue or receive a 1099 Form, as well as the resulting tax implications so your business can remain fully compliant throughout tax season.
Understanding S-Corps and 1099 Forms
An S corporation, also known as “S-Corp,” is a type of business structure that allows for pass-through taxation, meaning that the business’s profits and losses are passed through to the shareholders and reported on their (individual) tax returns. It enables the company to avoid double taxation, which occurs when the corporation pays taxes on income and the shareholders are taxed on the dividends.
Form 1099 is part of the Internal Revenue Service’s information reporting system, used by businesses and self-employed individuals to report their income. The form is primarily used to provide information to the IRS about income from non-employment-related sources other than wages, salaries, and tips, which are reported on Form W-2. This could be income from freelance work, interest and dividends, government payments, withdrawals from a retirement account, etc. Form 1099 helps maintain transparency about an individual’s or a business’s income, ensuring that the correct amount of tax is reported and paid.
Do S-Corps Get 1099 Forms?
In most scenarios, S corporations do not receive 1099 forms. If an S corporation is paid for services provided, then it is neither issued a 1099 nor does it complete a W-9 Form. As a pass-through entity, S corporations report the income on the business owner’s business tax return, and the tax is paid on the individual’s personal tax return via a K-1 document.
On the other hand, if an S corporation pays more than $600 in a single calendar year to a non-corporate service provider, then the S corporation must issue a 1099 Form to the service provider. Limited liability companies (LLCs), sole proprietorships, and partnerships are all required to receive 1099 Forms for services provided. If an S corporation does not issue the 1099 when required, then it cannot deduct the contractor expense on its business return.
When Does an S-Corp Receive a 1099 Form?
While S corporations are typically exempt from receiving 1099 Forms, there are a few exceptions that these businesses must still remain mindful of.
S corporations should expect to receive and thus file a 1099 Form in the following common scenarios:
- Legal fees to attorneys, even if the attorney is incorporated. If the attorney payment is for services relevant to your S corporation’s area of business, your corporation will likely file Form 1099-NEC, Nonemployee Compensation. In the event that the attorney payment is for services not directly related to your business, such as a settlement payment, you may opt to file Form 1099-MISC, Miscellaneous Income.
- Medical fees to for-profit medical and healthcare service providers. In this scenario, your S corporation will likely file Form 1099-MISC.
If you are unsure if your S corporation may be required to issue, receive and/or file a 1099 Form, contact one of our seasoned tax professionals to schedule a free consultation.
S-Corps and Federal Income Taxes
Unlike a C corporation, which pays taxes on its earnings, an S corporation is a pass-through entity. The corporation passes through its income, deductions, and credits to its shareholders, who report them on their tax returns.
An advantage of the S corporation tax structure is that it prevents business owners from being taxed twice on the same income. In a traditional corporation, the company pays taxes on its profits, and then the shareholders pay taxes on the dividends they receive. With an S corporation, the company’s profits are not subject to federal income tax, so the shareholders only pay taxes on their share of the income. An S corporation sends its shareholders completed copies of Form 1065, Schedule K-1, which reports the recipients’ shares of the business’s income, deductions, credits, and more. Shareholders of S corporations are also exempt from self-employment tax because they can receive a salary via W-2, and so the S corporation files the necessary payroll tax returns.
Form 1120-S is the tax form S corporations use to report their income, deductions, and losses to the IRS. If you are running an S corporation, you will need to file Form 1120-S every year, even if you did not have any income or activity during the year. The form is due on the 15th day of the third month after your corporation’s tax year ends. For example, if your tax year ends on December 31, your Form 1120-S is due by March 15 of the following year.
In some cases, an S corporation may elect to pay pass-through entity taxes at the state level. In some states, this can often be a good tax planning strategy, so be sure to consult with a tax professional to assess whether or not your business could benefit in your operating state.
Tax Implications of S-Corp Distributions
In addition to the regular payroll salary received for work done, shareholders of S corporations can also earn distributions from the business’s profits. This income is not subject to self-employment taxes and is thus taxed at a lower overall tax rate than the rate at which the salary gets taxed. While this distribution does not have a tax impact on the business, it sometimes has tax implications on the shareholder’s personal tax return.
If a shareholder distribution in any one tax year exceeds the shareholder’s stock basis, or total financial investment in the corporation, this excess distribution is reported as a long-term capital gain on the shareholder’s individual tax return. For more information and guidance on shareholder distributions, contact a tax professional.
Conclusion: Ensure 1099 Compliance for S-Corps
In order to remain in full compliance with the IRS, S corporation business owners should make sure they understand how to navigate the process of issuing, receiving, and filing 1099 Forms.
- File on time — The deadline to issue and receive Form 1099-NEC to both the recipient and the IRS is January 31 of the year following the eligible tax year. The deadline to issue, receive, and submit Form 1099-MISC is February 28 for paper filing and March 31 for electronic filing. Missing these important deadlines can result in fines and other penalties.
- Compliance – Ensure you comply with all of the requirements to maintain your S-Corp Status and consult with a tax professional..
- Keep accurate records — Maintain an organized filing system to keep track of all your business transactions. This will help you retrieve the right tax information when it comes time to issue and receive 1099 Forms.
- Report all income — Whether your S corporation receives or issues a 1099 Form, you must still report all of your business’s income to the IRS by filing Form 1120-S.
- Consult with a tax professional — There are many moving pieces you have to carefully monitor and manage as an S corporation business owner. When you schedule a free consultation with one of our seasoned professionals at Manay CPA, we can help you and your business get more organized and feel more confident about handling 1099 Forms each tax year.
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