LLC Partnerships: To Issue or Not to Issue a 1099-NEC?

Starting a new venture looks very promising AND there are a lot of legal and financial processes involved, which have to be taken care of.

And for any business, like when my friend Raj wanted to start, tax is among the top players on the list. Usually finding the best way out cut down taxes individually is a difficult task. And that’s why Raj went to a financial expert. I am going to tell you what the financial expert told him.

We need to decide how we want our LLC tax structure to be

LLC’s have a business structure designed to help you shield yourself from liability in your business.

Taxing in businesses is very tricky, and so is the case for LLCs. We will consider the two types which support the 1099-NEC with their operating structure. 

As the name suggests it is a one-person-owned LLC, which is a disregarded entity. Implying that when taxing, that individual is considered the same as the LLC and all the income and losses go directly to the owner.

Single-member LLC owners have to file their business activities on Schedule C of their taxes. So their income is subject to self-employment tax as well. 

Navigating the tax landscape for LLCs requires a nuanced understanding of how different structures—whether single-member or multi-member—impact taxation and necessitate distinct reporting obligations.”

Financial Taxation Expert

If you have a partner in your LLC, it is termed an LLC partnership. During the taxation process, the owners have to not only deal with their taxes but also file the partnership tax return form 1065. 

Although income is handled similarly to single-member LLCs, it is again subject to self-employment tax.

The income passes through both partners and is linked to their social security numbers. 

The Icy Whiz team talked to Rhett Stubbendeck, Founder of Leverage, about navigating the complexities of tax obligations for LLC partnerships. Here is what he said:

“As Rhett, the founder of Leverage, I’ve worked a lot with LLC partnerships and their tax obligations. One key aspect is issuing the 1099-NEC form to contractors.

If you pay a contractor $600 or more in a year, you need to send them a 1099-NEC. This keeps everything transparent with the IRS. At Leverage, we always track payments carefully to stay compliant and help our contractors keep their tax records in order.

It’s also important to know if your contractor is truly independent. They should work under their direction, not as a regular employee. I learned this the hard way early in my career when a mix-up led to an IRS audit.

Now, at Leverage, we make sure to clearly define roles right from the start.

Issuing a 1099-NEC is crucial for both the business and the contractor. For businesses, it avoids IRS penalties. For contractors, it clarifies their tax obligations, so there are no surprises later.

At Leverage, we play it safe: when in doubt, issue the form. This approach keeps us compliant and builds trust with our contractors.”

Not every LLC needs a Form 1099-NEC – but you probably need one

The payment that you make to your contractors and nonemployees, is reported by the  Internal Revenue Service IRS.

Moreover, IRS uses a form called the 1099-NEC where the NEC stands for Non-Employment Compensation and they provide services for your business. And for Raj, who had been in the gig economy before, he was on the other side of it all.

“For LLC partnerships, the issuance of the 1099-NEC form to contractors is more than a regulatory requirement. It’s a reflection of the evolving nature of work and the gig economy’s impact on traditional business models.”

Gig Economy Taxation Expert

So, If you’re an LLC Partnership and if you have hired contractors or independent workers who generate more than $600 in a year for your business you need to send them the 1099-NEC form at the end of the tax year.

The form is used by LLCs or other employers when they are paying someone for their services, who does not fall under the regular W-2 employee criterion. 

When Does LLC Partnership Receive a 1099-NEC?

Every business will need to issue and receive the form in a few different ways:

• If you hire an independent contractor to provide services for your partnership, and he/she makes more than $600/year and is also not considered your employee then you can issue them a 1099-NEC form. Employees of this kind would include workers like website designers, consultants, or any other freelancers. 
• If you have a LLC Partnership, and it rents out some property to a person who is not your employee per se, then also you need a 1099-NEC Form. So, if you rent your space to some other LLC also, even they have to send a 1099-NEC if you receive more than $600 in rent for a year. 
• If as an LLC, you receive any kind of professional help/service or consultancy for your LLC from a non-employee and you pay them more than $600 in a year, you will have to issue a 1099-NEC to them too. 
• Now consider you’re getting custom designing for your LLC done, maybe in interior space or some specific customizations for your product whatsoever. If these are being provided by a professional who is not your employee, and the engagement ends in you paying them more than $600 in a year then you will again have to issue them a 1099-NEC form. 

• If your LLC is taxed like a sole proprietor, implying the income is going through the member’s tax returns so the business does not pay taxes on the income. If it is taxed any other way, like maybe as an S corporation, it will not get the 1099 Form. 
• If your LLC is providing service to a customer, on a contractual basis and the revenue generated by that service is more than $600 in a year, then the same principles stated above apply to you as well. 

George Birrell, President of Taxhub, shared valuable tips to navigate the complexities of tax obligations for LLC partnerships. Here is what he had to say:

“Some essential tips are as follows:

• The first thing you need to consider is the amount of Form 1099-NEC threshold. The threshold for issuing Form 1099-NEC is $600 or more in nonemployee compensation paid during the calendar year.
• Make sure to classify the contractor as an independent contractor and not as an employee. If you classify the contractor as an employee, you need to do federal and state tax withholdings as well. In addition, make sure the correct type of payment is reported on Form 1099-NEC.
• Make sure to obtain the correct taxpayer identification number (SSN or EIN) of the contractor for accurate reporting. 
• You should prepare and send a copy of Form 1099-NEC to the contractor by Jan 31st of the year following the tax year. Delay in sending Form 1099-NEC may create issues in contractors’ tax return filing.
• You should have a proper record-keeping system in place to accurately track contractor information and payments, which will make the final issue of the form easy.

How does this decision impact both the business and the contractors involved?

The business should be able to deduct the contractor expenses as a deduction on the LLC tax return. They can also deduct the expenses incurred in connection with the issuance of Form 1099-NEC.

The contractor, who receives the Form 1099-NEC is liable to report the Form 1099-NEC payment on their tax return.

As one copy of the Form 1099-NEC is already submitted to the IRS, not reporting Form 1099-NEC will create matching issues and the IRS will send notice and may charge additional penalties and interest.”

Eight Steps for LLC Partnerships and Form 1099 

• LLCs can expect 1099-NEC forms because they generally receive non-employment compensation. The form will state all income received by the LLC in that year that falls under the nonemployment compensation as the services were not provided by normal employees who fall under the W-2 form. 
• Although sole proprietors use their social security numbers for tax forms, which works for them because they are the same as the business. However, in LLC partnerships you will require the Employee Identification Number to include on your 1099. 
• Even though you’re issuing or receiving a 1099, you must make sure to submit a form W-9. The contractors and vendors that you hire should complete a W-9 for you. It allows the business in the long run to issue the 1099 when required. 
• Clarify beforehand how the vendors and contractors are taxed. You only need to submit a 1099 if they are not taxed as an S corporation. You might be having an LLC but that is not the deciding factor in this case. 

• Always keep a plan of action in mind for the self-employment taxes, if you are not taxed as a corporation you will have to submit to self-employment taxes and receive a 1099. 
• All LLCs have to pay quarterly taxes and within the year cover not only their income but also their self-employment tax obligations. 
• Always keep a record of your 1099s. And by the record, it implies that you keep in store everything that is roughly 3-4 years down the line. 
• Make sure you get an expert on board otherwise all these processes might become very overwhelming and you might not be knowing about all forms and rules so it might hamper your whole tax processing as well.
  

LLCs and Form 1099 are not exclusive, although there are some conditions with them.

We interviewed Ben Michael, Attorney at M & A Criminal Defense Attorneys, on this. Here is an excerpt from the interview:

“1099-NEC forms are necessary tax forms that any non-employee worker your company has paid needs to receive for both you and them to be legally compliant from a tax perspective.

This form is required of anyone who is paid more than $600, according to the IRA (this number can change, so make sure to pay attention each year).”

Implying to those, along with following the non-employment compensation will lead you to a long way ahead with lesser hurdles. 

Guest Author: Saket Kumar

Last Updated on May 14, 2024 by soubhik