Key Takeaways:
- LLC partnerships are limited liability companies with two or more members. They aren’t taxed as corporations unless they choose this arrangement with Form 8832
- You should receive a Form 1099 from any entity that pays you at least $600 during the year
- You will not receive a 1099 if you’re taxed as an S corporation
- Eight steps for LLC partnerships and Form 1099:
- Expect Form 1099-NEC
- Make sure to use your EIN
- Get or submit Form W-9
- Ask vendors how they’re taxed
- Plan for self-employment tax
- Pay quarterly estimated tax
- Keep 1099s for at least three years
- Work with a tax expert
- Store your tax forms securely, stay transparent with the IRS, and expect multiple 1099s if you worked for various clients during the year
Your business structure informs how you do a multitude of tax-related tasks. Sole proprietors generally have the smallest paperwork burden, since they report everything on their personal tax return. The same goes for most single-member limited liability companies (LLCs), though both of these simple entities have to pay self-employment taxes.
Things get more complicated with some large entities and corporations. Many business owners decide to create an LLC for benefits such as personal liability protection, minimal obligations, less paperwork, more flexibility, and avoiding double-taxation. They can still get important protection of their personal assets while running a business, but they only have to worry about pass-through taxation.
LLC partnerships are common entities, as they are LLCs with at least two members. Many owners may wonder if they’ll receive a Form 1099 as this kind of entity, as well as when they will need to issue 1099s to third parties they work with.
How do these business structures work, and do LLC partnerships get a 1099? The answers are here. This guide covers everything you need to know about LLC partnerships and Form 1099.
What Is an LLC Partnership?
There are several ways to structure a business depending on the goals of the owners, tax implications, and other factors. LLCs may be treated as corporations or partnerships by the IRS, or income may be treated as part of the owner’s personal tax return.
LLC partnerships are LLCs with at least two members, as mentioned above, and an LLC with only one member is usually treated as an entity that is not distinct from the owner. The owners in both of these scenarios, however, can file Form 8832 to elect to be treated as a corporation. LLCs aren’t treated as corporations automatically even though they provide business owners liability protection.
That added liability protection is why many sole proprietors and partners decide to form an LLC. They can separate their business assets from their personal assets, putting an important layer of protection in place.
Some states allow what’s called a limited liability partnership (LLP), in which partners aren’t separate from the partnership liability, but they may be separated from liability associated with the other partners. This situation is more similar to a general partnership with a bit of extra liability protection.
The LLC partnership members need to file Form 1065 with the IRS, which outlines the business’s earnings. The members, however, report the earnings on their individual tax returns using Schedule K-1, and that income is subject to pass-through taxation. Typically, only when the partnership grows significantly and brings in a lot of income do members decide to switch to being taxed as a corporation.
Does an LLC Partnership Get a 1099?
Form 1099 is used by businesses when they paid someone for services who wasn’t a regular W-2 employee. They are commonly used for independent contractors, freelancers, and some business types, including partnerships. Here are the scenarios when a 1099 would be used:
Receiving $600 or More in Nonemployee Compensation
Contractors or businesses, including LLCs, that provided services to a company and received at least $600 in nonemployee compensation will receive a Form 1099 from that entity. They need to report this income to the IRS on their tax return.
Being Taxed Like a Sole Proprietor
Your LLC partnership may be taxed just like a sole proprietor, where the income is passed through to the members’ own tax returns, and the business doesn’t pay taxes itself on that income. An LLC will only receive a Form 1099 if it is taxed this way. If it is taxed as an S corporation, it will not receive Form 1099.
Both Receiving and Issuing 1099s
Some businesses both receive 1099s from their clients and issue 1099s to their contractors. Paying anyone $600 or more for services means you will also have to submit a 1099 for them so they know what income to report on their tax return.
Whether or not your business gets a Form 1099 will depend on these factors, and you’ll need to pay close attention to what your obligations are if you hire vendors or contractors. Talk to a tax professional when you’re not sure what you should do.
Eight Steps for LLC Partnerships and Form 1099
LLC partnerships that aren’t taxed as S corporations should expect to receive a Form 1099 from each of their clients, and they may have to issue these forms to contractors or vendors they work with. Where do you start? Here are eight steps to take when you’re dealing with Form 1099 as an LLC partnership:
1. Expect Form 1099-NEC
LLCs generally receive IRS Form 1099-NEC, Nonemployee Compensation. This form summarizes all income the LLC received during the year, which is classified as nonemployee compensation since the work was not done as a normal employment relationship (in which the worker would receive a W-2 from their employer).
2. Use an Employee Identification Number
Many sole proprietors simply use their Social Security number on their tax forms, which is allowed since they are not separate from their businesses. However, for LLC partnerships, you need an employee identification number (EIN) to include on your 1099s.
3. Get or Submit a Form W-9
No matter what side you’re on in receiving or issuing 1099 services, you will need to know Form W-9. The entity you provide services to will need one filled out for your LLC, and you will need to ask contractors and vendors you hire to complete a W-9. They will check a box on this form that indicates the type of business they are, whether a sole proprietorship, single-member LLC, C corporation, S corporation, partnership, trust, or LLC partnership. This form allows the business entity to issue Form 1099 with all the correct information when the time comes.
4. Ask Vendors How They’re Taxed
Just because you do business with an LLC doesn’t always mean you have to submit a 1099 for them. Ask any contractors or vendors if they’re taxed as an S corporation. If they are, you don’t have to submit a 1099 for them.
5. Plan for Self-Employment Tax
Your partnership will be on the hook for self-employment taxes if you aren’t taxed as a corporation and receive a 1099. The self-employment tax is currently 15.3%, which includes 12.4% for Social Security tax and 2.9% for Medicare tax.
6. Pay Quarterly Estimated Tax
LLCs that have pass-through taxation have to pay quarterly tax payments throughout the year to cover their income and self-employment tax obligations. These taxes are reported on Form 1040-ES and are typically due on April 15, June 15, Sept. 15, and Jan. 15, but the deadlines may be different each year depending on where weekends and holidays fall.
7. Keep 1099s for at Least Three Years
Put a process in place for keeping and storing your 1099s somewhere safe. You need these records for at least three years from the date you filed your initial tax return, or two years from when you paid the tax, whichever is later.
8. Work With a Tax Expert
All of this may sound like a lot, especially when you’re doing taxes on your own. Contacting a tax professional allows you to get a better grasp on the tax implications of your business structure. You will know exactly what you need to do with your 1099s and how to report everything properly to the IRS. Don’t try to do it all on your own as an LLC partnership, especially when you’re a new business.
Remember that the way your business is taxed makes a big difference on how you’ll report and pay your taxes. Get familiar with Form 1099 when you provide services to other entities and earn more than $600 from them in a year. Turn to a tax expert if you have questions about Form 1099.
Common Pitfalls of LLC Partnerships and Form 1099
It’s easy to make mistakes when running an LLC partnership. Tax law can be overly complicated, and there are a lot of due dates and responsibilities to keep track of. Knowing some common pitfalls and their solutions can help you stay on track all year:
- Use Always include your partnership’s EIN on your Form 1099 or W-9, not your Social Security number.
- Don’t sweat it if you file a 1099 for a contractor that doesn’t require one, like an LLC that’s taxed as an S corporation. You won’t be penalized for doing this.
- Make sure you file a Form 1099 for all the contractors you work with who qualify to receive one. The IRS will penalize you between $50 and $280 per missed Form 1099.
- You may receive multiple 1099s. You should get one from every entity you provided services for throughout the year. You need to report each of them and your earnings on your annual tax return.
- Be careful not to miss any tax deadlines. Some new businesses forget that they’re required to pay quarterly estimated tax payments on top of submitting their annual tax return each spring. Set notifications and reminders on your calendar so you never miss a deadline. Otherwise, you will incur a fee from the IRS.
- Understand how 1099-MISC and 1099-NEC are different. Form 1099-MISC is used by businesses for every individual or non-corporation it has paid at least $600 for rent or medical payments and over $10 in royalties. Form 1099-NEC is used for any nonemployee payments of $600 or more.
- Store your tax records safely and securely. Keep all 1099s together so you have them for your tax return, and make sure you store other W-9s securely if you need to gather them. Maintain your records for at least three years from the date you filed your return.
- Always be transparent with the IRS. Some businesses try to lower their income or exaggerate facts about their business to try to pay less tax. Doing so will only lead to more trouble and unnecessary costs. Stay open and honest with the IRS.
Putting best practices in place and watching out for these pitfalls can help ensure you’re following all IRS guidelines as an LLC partnership. Pay close attention to every notice or document you receive from the IRS, as well, and make sure to respond in a timely manner.
Contact Silver Tax Group for Help With Form 1099
You want to do all you can to ensure your business succeeds. Forming an LLC partnership is a great step to obtain more liability protection. Just make sure you understand how your LLC will be taxed, whether via a pass-through situation or as a corporation. You should receive Form 1099, if the former tax situation applies to you, from each third party you do business with. This form helps you report all your income on your tax return each year.
Turn to Silver Tax Group when you need assistance with your LLC partnership or with Form 1099. Our tax attorneys provide expert guidance on a range of tax issues your business may be dealing with, including debt resolution, audits, tax forms, tax preparation, emergency tax services, defense, and many more. Reach out to Silver Tax Group to speak to a tax expert about tax forms and business structures.
