If you own a limited liability company (LLC), you might hire out some work from time to time. Perhaps you hired freelance workers — for example, a web designer to build you a new website, or a writer to produce the content for that website.
If so, you may be wondering whether your LLC needs to provide these contractors with Form 1099 from the Internal Revenue Service. The 1099 is a versatile form that covers a variety of contract, freelance, and other non-employee work. But how do you determine whether your LLC needs to give out these forms? And who should you provide them to?
In this article, we’ll discuss all the necessary details about LLCs and Form 1099. Let’s find out if your business needs to send out any 1099 forms this tax season.
What Is a 1099 and Who Should Receive One?
The IRS Form 1099 (officially referred to as Form 1099-MISC) is the document used to report miscellaneous income to the government. As an individual, 1099 forms are filed for income earned as a non-employee.
While the typical employer-employee relationship uses Form W-2 to track income, Social Security, and Medicare taxes, a 1099-MISC is used by self-employed individuals, including freelancers and independent contractors.
Form 1099-MISC is a rather simple document consisting of one single page. Many of the items on this form can be safely ignored by the vast majority of business owners, as the IRS has boxes on the 1099 that refer to extremely specific types of income. These include fishing boat proceeds, crop insurance proceeds, excess golden parachute payments, section 409A deferrals, and more.
LLCs typically do not receive Form 1099, but they do provide one for every freelancer or independent contractor hired throughout the course of the year, as long as that person earns at least $600 from your LLC in that year.
What’s the Difference Between an Employee and a Freelancer?
Some business owners don’t fully understand the difference between an employee and a contractor, so let’s quickly break that down before we move on. The IRS considers an employee to have a set relationship with their employer.
This means that the employee works hours dictated by the employer, and completes tasks as the employer requests them. In return, the employer provides the employee with benefits, typically including health insurance, 401(k) accounts, etc.
On the other hand, self-employed people can also be assigned specific work by the business, but at the end of the day, the freelancer has the freedom to perform that work at any time and in any way they deem fit. The only aspect of control the business has over them is a general deadline for the completion of this work.
With an employee, a business is required to withhold taxes on behalf of its employees. In addition, the business is responsible for paying the employee’s Medicare and Social Security taxes. That’s not the case for independent contractors, because they are required to pay self-employment tax, which includes both the employer and employee portions of Medicare and Social Security.
What Information Do I Need for a 1099 and How Do I Get It?
When you first hire a new contractor or freelancer, you should immediately provide that person with IRS Form W-9. You don’t actually need to file the W-9 with the IRS, but instead, you should hold onto each W-9 in your business records.
When it comes time to distribute 1099s to your contractors, you can use the W-9 forms they filled out earlier to complete each 1099-MISC. The information typically included in a W-9 is as follows:
- The freelancer’s name
- The name of their business or disregarded entity (if they have one)
- The federal tax classification of the freelancer
- The freelancer’s street address
- The Social Security or employer identification number used by the contractor
- The signature and date the form was completed
Once you compile all the information you need using W-9 forms, you need to make sure you distribute the 1099-MISC forms to your contractors and freelancers as quickly as possible once the calendar turns over to January. Without exception, your contractors must all have their 1099 forms by the end of January, because they need time to be able to prepare their own taxes before April 15.
What if I Don’t Provide My Contractors With 1099s Before Jan. 31?
If you still have some time before the January 31 deadline, and you don’t think you’ll be able to send out your 1099-MISC forms in time, you can ask the IRS for an extension. To do so, you’ll need to write them a letter including your name, EIN, address, and signature, along with an explanation of what made you request the extension in the first place.
You also might need to file a request for an extension on your own informational return — keep in mind that most LLCs do not pay corporate-level taxes, so they file informational returns rather than actual business tax returns. To request this extension, you can complete Form 8809 — the “Application for Extension of Time to File Information Returns,” a simple, single-page form.
What if you’ve already missed the January 31 deadline? In this situation, you will be subject to financial fees from the IRS. If you’re less than 30 days late, you will pay a fine of $50 per return. If you distribute your contractors’ 1099s anytime between March 3 (March 2 in leap years) and August 1, the fine increases to $100.
Filing after August 1 escalates that fine to $260, and if the IRS determined that you intentionally ignored their deadlines, they’ll fine you at least $530 per return, and they reserve the right to add additional fines on top of that.
In short, it’s in your best interests to get your contractors’ 1099-MISC forms in their hands in as timely a manner as possible.
For most limited liability companies, the task of distributing IRS Form 1099-MISC to your contractors and freelancers is a relatively straightforward endeavor. You just need to make sure you provide them with Form W-9 in a timely fashion, and keep these forms in your records until it’s time to send out the 1099s.
Especially considering that both the 1099 and the W-9 are simple documents, there’s no excuse for most LLCs to compile the necessary information and send out the forms before the deadline. Of course, there are sometimes extenuating circumstances, but if you let the deadline pass without requesting an extension, you could be on the hook for some significant fines.
We hope this article helped you enhance your understanding of how LLCs should distribute 1099s! If you have any further questions, you should probably direct them to the IRS, an accountant, or a tax attorney.