(NOTE: I have been terrible about writing posts this year; I am finally back at a point of being able to blog again, so you’ll see posts more often from me. And if this post is any indication, I have my flair back that so many people liked, of writing with humor and going on long tangents with parenthetical references within parenthetical references.)
Here’s something a client said to me back in January. The client is a 1-person LLC taxed as a sole proprietorship.
He paid, for contract labor, a “friend” who is also a 1-person LLC taxed as a sole proprietorship.
My client said, in regards to issuing a 1099 to the “friend:” “My friend says I don’t have to give him a 1099 because it’s a business-to-business transaction. We’re both LLCs and as long as we have invoices to back it up I don’t need to 1099 him.”
To which I just laughed and told the client that his “friend” was wrong.
The client responded by saying he would “talk to his friend and deal with it” himself.
I Think I Just Might Know More About This than Your “Friend”
So here’s the thing — I present on the topic of 1099s. (Not to brag, but I am a bit famous for my 1099 presentations.)
So I think I know more about this than someone’s random “friend” who has an ulterior motive for not wanting a 1099 issued.
(Side note: I think in most cases — not just 1099s — I know more about taxes than the “friend” or “neighbor” or “dentist” [seriously, one time a client went on and on to me about some supposed tax strategy their dentist had told them about during the client’s dental visit].)
Anyway, in my presentations (often given to other tax pros but sometimes to industry professionals such as HR people, etc.), I get questions from participants.
Do you know, the question posed in the title of this post comes up periodically and the wording is exactly the same as the wording my client said to me.
ALWAYS, it’s something about “business-to-business transactions,” having “invoices to back it up,” and not needing to issue 1099s when both businesses are LLCs.
I wonder if there’s something out there online, like on a message board or something, about this, because it’s always the same wording.
One tax pro told me she hears this frequently and wanted to know how I combat it.
It’s Flat-Out Wrong
Well, there’s not much to say on this other than it is flat-out, 100% wrong.
If you are an LLC (of any type; whether you’re a sole proprietor or an S-corporation or whatever) and you pay a 1-person LLC that is taxed as a sole proprietorship, and you pay that 1-person LLC for contract labor: you need to issue a 1099!
This is a Fact, Not an Opinion
That is not “Jason’s opinion.”
This is not “Jason being overly conservative” in interpreting something.
This is not “Jason not pushing gray areas.”
(I have had clients tell me multiple times that I am “overly conservative” on what I will allow as a deduction [for example] or that they “need someone who will be more creative and push more gray areas” than me. This usually is in response to some crazy, crackpot idea where I know for sure what the answer is but the client doesn’t like what I am saying. I am so sick of this that I want to grab those clients by the collar and throw them out the window. Taxes are hard, dammit, and some “friend” or freaking “DENTIST” probably doesn’t know a damned thing about the subject — maybe they do something on their tax return and they “get by with it” but that’s probably because the audit rate is literally 0.6% and so they just get lucky and don’t get caught rather than knowing what they hell they are talking about. And also I don’t opine about dental hygiene to my clients — I leave that to dentists, so maybe the dentist should stay quiet about taxes and leave that to me!)
I digress again.
Where was I?
Oh yes, 1099s.
The Only 1099-MISC Exception is to Corporations — An LLC is Not a Corporation
Needing to issue a 1099 in this circumstance is just the way it is and is not open for interpretation.
Even if it’s your dentist saying it. (I am not going to let the dentist thing go, am I?)
The exception to issuing a 1099 for contract labor is for payments to corporations.
An LLC is NOT a corporation. The “C” stands for “company” not corporation.
A 1-person LLC is, by default, taxed as a sole proprietorship. Thus you need to issue a 1099 unless the LLC has filed paperwork with the IRS to be taxed as a corporation.
That is where the Form W-9 comes into play, where the contractor marks their tax status. If they are an S-corp, then no 1099. If they are just a regular old sole proprietorship (which is often going to be the case) then you’d issue a 1099.