If you’re a single-member LLC or taxed as a partnership, you will receive a 1099 from a company that pays you $600 or more in annual income.
A Comprehensive Guide on LLCs and 1099s
Why do you think experts recommend independent contractors and freelancers to get an LLC and not continue to opt for a C corporation or sole proprietorship? It’s because an LLC has more benefits than its counterparts and you can enjoy those facilities as your business grows.
Does that mean there will be a significant difference in your tax situation? Probably not. You may still get your 1099 like before, but it depends on how the IRS taxes your LLC that determines whether your LLC gets 1099 or not.
Know your LLC better
An LLC or Limited Liability Company is similar to a corporation. It protects you from the liabilities that you may come across in your business. LLCs offer legal protections at the state level. Therefore, you should check the extent of legal protections you may expect to receive in your state at the time of registering for your LLC.
Taxing process of an LLC
Honestly, it is a complicated process to file taxes for a business. Different LLCs have different rules and regulations and that makes the entire process a bit tricky.
Single-member LLC
It is comparatively easier to file taxes for a single-member LLC. The IRS considers a single-member LLC a “disregarded entity,” meaning the LLC is the same as the business owner. The income and losses of your LLC will pass on to you.
If you have a single-member LLC, you should first report it to Schedule C of your personal tax return. This would bring your company’s tax file under self-employment tax. You may think that the process is similar to what a sole proprietor would do. Yes, it’s basically the same and you can enjoy the write-offs that sole proprietors get.
The advantage of registering for an LLC even if you are a sole proprietor is that it protects you from the legal risks of running a sole proprietorship business.
Partnership
Co-owning your LLC with another person is deemed as a partnership business. While filing your tax, make sure you fill out the IRS form that specifically focuses on partnership businesses. You can ask for Form 1065, in this case. In addition to filing taxes for your partnership business, you should also pay attention to your personal tax returns.
First of all, read the entire Form 1065 carefully. Make sure you have the necessary details handy, such as gross income and gross expense. The revenue your business makes passes on to you and your business partner and it gets linked to your personal Social Security Number. You need to provide the information when you file your personal tax return.
According to Schedule C, the income of a partnership business is similar to a sole proprietor or single-member LLC. This also indicates that the income is subject to self-employment tax also.
S Corporation
If you think carefully, you will notice that there aren’t any tax benefits for partnerships and single-member LLCs. However, that’s not the case with an S Corporation.
Experts believe that S Corps have the best business structures when it comes to enjoying tax benefits. In fact, it is possible to get away with a few self-employment tax liabilities, provided you set up your LLC by following all the rules and regulations set by the IRS.
Yes, you would need to fill out a few extra tax forms and also consider yourself as a salaried employee if you want to make the most of the tax facilities. The only drawback that you may point out is that the facility is for businesses that make a substantial amount of money every year. But you still have an opportunity to get the better of the IRS if you manage to get your business’s income taxed as an S Corp.
LLCs and Form 1099-NEC
How you set up your LLC determines its tax status. The difference is simple – your LLC will receive a 1099 if it’s a partnership business or a single-member LLC. It won’t receive a 1099 if it’s an S Corp.
How to issue Form 1099-NEC?
There are two sides to a 1099 – issuing and receiving. As a business owner, you need to do both. For example, you need to file a 1099 if you buy goods worth $600 or more from a vendor. However, it’s only applicable for a partnership business or single-member LLC. It may be difficult for you to understand whether the vendor is taxed as an S Corp or not. The vendor may use LLC as a suffix at the end of its company name.
The best way to deal with this confusion is to ask the vendor whether his LLC is taxed as an S Corp. You can ask this while requesting his Taxpayer Identification Number. If his LLC comes under an S Corp tax slab, you wouldn’t need to file anything separately for his company. That means less documentation for you!
LLC and self-employment taxes
The only thing that you need to keep in mind about LLCs and 1099-MISC forms is that you would require them only if your LLC is a partnership business or single-member LLC. The revenue earned from these two LLCs will also go under your self-employment tax.
While filing for an LLC for tax purposes may not seem like a fruitful idea, you should think of the legal liability of your business. An LLC protects that liability on your behalf.
What matters the most is whether you know about the write-offs that your business and personal income can benefit from. It would not only help keep your budget intact but also deal efficiently with your self-employment tax.