Is a 1099 Required for an LLC?

By Stephanie Kurose, J.D.

Is a 1099 Required for an LLC?

By Stephanie Kurose, J.D.

A limited liability company (LLC) is a common type of business structure that includes the most desirable characteristics of both a corporation and a partnership. For instance, similar to a corporation, owners, called members, are offered personal liability protection in the event the business is ever involved in litigation. However, like a partnership, it gives its members greater managing flexibility.

Man using laptop sitting next to a cup of coffee

Despite the popularity of LLCs, the Internal Revenue Service (IRS) does not have a specific tax designation for this type of business. As a result, members can elect to be taxed either as a partnership or a corporation. The IRS does, however, have specific designations for independent contractors, which are often used. Thus, a company that utilizes the services of independent contractors will typically fall within the IRS requirements for filing Miscellaneous Income (Form 1099-MISC).

How LLC Taxation Matters and the IRS Form 1099-MISC

As an initial matter, depending on how the LLC elects to be taxed, as either a partnership or as a corporation, the associated form may not need to be issued. An LLC that is taxed as a corporation files different forms that replace the use of Form 1099-MISC. However, if an it is taxed as a partnership, the IRS requires it to issue Form 1099-MISC.

The IRS uses Form 1099-MISC to keep track of how much money or other benefits the LLC has paid an independent contractor, subcontractor, or other nonemployee. The business must provide the independent contractor with Form 1099-MISC.

Both the LLC and the independent contractor are responsible for the form. The business uses it to prove expenses, and the contractor uses it to report the income and pay any necessary taxes on that income.

When an LLC Must Provide Form 1099-MISC

The IRS provides five different situations where an LLC must provide someone with Form 1099-MISC. These include:

  1. When payments to independent contractors, contract employees, attorneys, or accountants are $600 or more
  2. Royalty payments, tax-exempt interest, or substitute dividends that are larger than $10
  3. Rent payments higher than $600 (unless paid to a real estate agent)
  4. Prize payments higher than $600
  5. Payments to members of fishing boat crews

If the business engages in any of the above activities, the IRS requires it to provide the person with Form 1099-MISC.

Employees vs. Independent Contractors and Penalties

Small LLCs often use contractors, subcontractors, or other nontraditional employees for many of their services. By employing these individuals as contractors rather than employees, the business can avoid many tax, regulatory, and liability problems. However, the IRS closely scrutinizes whether an independent contractor is actually an employee and can reclassify the business's liability if it determines the contractor had the characteristics of an actual employee.

If a business fails to comply with these rules, the IRS may impose harsh penalties that can include late fees, interest, or both. In addition to noncompliance, the IRS can also impose penalties on businesses that wrongly classify employees as independent contractors.

After you've formed an LLC, you need to know how to pay its employees. The above information will help you understand when it's necessary to provide Form 1099-MISC and when it is not. Make sure your business is in compliance with the IRS and adheres to its five qualifying situations.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.