Yes. Plus, File a 1099 for Payments You’ve Made to LLPs
When running a business, understanding the nuances of your tax obligations and the documentation required to remain compliant with the Internal Revenue Service (IRS) is critical.
If your business has engaged an LLP for services worth $600 or more in a given tax year, it is required that you file a Form 1099-NEC to report those payments to both the IRS and the LLP itself.
However, before sending this form, you must ensure that the LLP provides your business with Form W-9, which contains the necessary taxpayer identification number (TIN) and other essential details.
What to Know About LLPs
LLPs are unique entities that blend features of partnerships and limited liability protection, making them a popular choice for professional businesses, including law firms, accounting practices, and medical offices. However, just like any other business entity, LLPs must comply with the IRS regulations regarding tax reporting.
A 1099 form is a means by which businesses report certain payments made to independent contractors, freelancers, and other non-corporate service providers. As with other types of partnerships, LLPs require that you send them a 1099-NEC form if the payments meet or exceed the $600 threshold.
What to Know About 1099s
It is essential to note that not every business entity is subject to 1099 reporting requirements. If your business has worked with a corporation, there is no need to send a 1099 form to that entity, regardless of the amount of money involved.
This is because corporations are generally treated differently under tax law and do not require this particular type of reporting. In contrast, general partnerships and limited partnerships (which include LLPs) are typically subject to 1099 reporting if the payment amount meets the $600 minimum threshold.
When it comes to sending the 1099-NEC form to an LLP, this must be done no later than January 31st of the following year to remain compliant with IRS guidelines. This deadline is important because failing to file on time can result in penalties for the business, including fines for late submissions.
Similarly, the IRS requires that a copy of the 1099 form be sent to them as well, so it is crucial to keep track of your filings and ensure that the paperwork is submitted to the correct addresses.
How to Prepare for Sending the 1099
To prepare for sending the 1099 form, one of the first steps is to request Form W-9 from the LLP. This form asks for the LLP’s taxpayer identification number (TIN), the business’s legal name, and its business structure, which are all necessary for accurately completing the 1099-NEC form.
The W-9 must be submitted by the LLP before you can send the 1099 form to the IRS. This ensures that your records are accurate and that the LLP’s payments are properly reported. If the LLP fails to provide a W-9 form, you are still required to file the 1099 form, but you may be subject to backup withholding at a rate of 24% until the W-9 is received.
Remember: Some Don’t Need a 1099
For example, the IRS does not require a 1099 form to be filed for payments made to corporations, whether they are C-corporations or S-corporations. However, payments made to other types of entities, such as general partnerships or limited liability partnerships, are subject to 1099 reporting. This is why it is important to know the specific business structure of the entity you are working with.
If you are unsure about whether the business is a corporation or an LLP, a simple review of the contract terms or discussions with the business in question should clarify their status. Once you have confirmed the entity’s structure, you can then proceed with the necessary 1099 filings if required.
Additionally, be aware that some specific types of payments may be exempt from 1099 reporting, such as payments made for personal services or those that fall under other IRS exclusions. Make sure to review these rules to ensure that your business is filing the correct forms.
Why Do So Many Choose to Form an LLP?
In terms of liability, one of the primary advantages of forming an LLP is the protection it offers to its partners. Much like a limited liability company (LLC), an LLP protects the personal assets of its partners from business debts and legal actions. This is a major benefit for business owners who want to separate their personal finances from their professional obligations.
In the event of a lawsuit or bankruptcy, the personal assets of the partners—such as their homes or retirement savings—are shielded from being used to settle business debts, provided they did not act negligently or intentionally engage in wrongdoing.
However, it is important to note that in an LLP, a partner may still be held liable for their own actions. This means that if a partner acts negligently or commits some form of malpractice, they could be held personally accountable for those actions.
In industries such as healthcare or law, this form of liability protection is highly valued, as it allows one partner’s mistake to be isolated rather than putting the entire partnership at risk.
LLP and Partners
Another benefit of an LLP is its flexibility in terms of management. Unlike a corporation, where shareholders elect a board of directors to make business decisions, LLPs allow the partners to manage the business directly. This can be especially advantageous for small businesses or professional services firms where the partners are heavily involved in day-to-day operations.
The flexibility of the LLP structure also makes it a more attractive option for businesses that want to avoid the rigid hierarchy and reporting structures associated with corporations.
LLP Pass-Through Taxation Explained
In terms of taxes, one of the most significant advantages of forming an LLP is the “pass-through” taxation. LLPs are generally not taxed as separate entities. Instead, the income and losses pass through to the individual partners, who report them on their personal tax returns.
This avoids the issue of “double taxation” that corporations often face, where both the business and the shareholders are taxed on the same income. Pass-through taxation makes the LLP an appealing option for many small business owners, as it simplifies tax filing and reduces the overall tax burden.
Potential Factors to Keep in Mind About Forming a LLP
While there are many benefits to forming an LLP, there are also some challenges. For example, LLPs are subject to state-specific regulations, which can vary depending on the location of your business. Some states may have more stringent reporting requirements or additional taxes that need to be considered.
Additionally, managing an LLP can be more complex than a sole proprietorship or general partnership, as it requires careful documentation and adherence to state laws to maintain liability protection.
In terms of filing obligations, it is essential for business owners to stay on top of their documentation and tax requirements. Filing a 1099 form for services rendered by an LLP is just one of the steps in ensuring that your business remains compliant with IRS regulations.
By carefully keeping track of your payments to LLPs and ensuring that the necessary forms are filed on time, you can help avoid penalties and maintain a good standing with the IRS.
Answering Your Questions Like: “Does an LLP Get a 1099 Form?”
At the Corporation Center, we understand that the formation and maintenance of business entities like LLPs can be complex. Our team is dedicated to assisting businesses in ensuring compliance with regulations, from the initial formation of an LLP to the filing of the required forms. Whether you are starting a business in Delaware or any other state, we provide the documentation and support necessary to ensure that your business is on the right track.
Laws that May Pertain to Your LLP
These following laws may pertain to you and your LLP. Reach out if you have further questions.
(a)Payments of $600 or more
All persons engaged in a trade or business and making payment in the course of such trade or business to another person, of rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income (other than payments to which section 6042(a)(1), 6044(a)(1), 6047(e), 6049(a), or 6050N(a) applies, and other than payments with respect to which a statement is required under the authority of section 6042(a)(2), 6044(a)(2), or 6045), of $600 or more in any taxable year, or, in the case of such payments made by the United States, the officers or employees of the United States having information as to such payments and required to make returns in regard thereto by the regulations hereinafter provided for, shall render a true and accurate return to the Secretary, under such regulations and in such form and manner and to such extent as may be prescribed by the Secretary, setting forth the amount of such gains, profits, and income, and the name and address of the recipient of such payment.
(b)Collection of foreign items
In the case of collections of items (not payable in the United States) of interest upon the bonds of foreign countries and interest upon the bonds of and dividends from foreign corporations by any person undertaking as a matter of business or for profit the collection of foreign payments of such interest or dividends by means of coupons, checks, or bills of exchange, such person shall make a return according to the forms or regulations prescribed by the Secretary, setting forth the amount paid and the name and address of the recipient of each such payment.
(c)Recipient to furnish name and address
When necessary to make effective the provisions of this section, the name and address of the recipient of income shall be furnished upon demand of the person paying the income.
(d)Statements to be furnished to persons with respect to whom information is required
Every person required to make a return under subsection (a) shall furnish to each person with respect to whom such a return is required a written statement showing—
(1)the name, address, and phone number of the information contact of the person required to make such return, and
(2)the aggregate amount of payments to the person required to be shown on the return.
The written statement required under the preceding sentence shall be furnished to the person on or before January 31 of the year following the calendar year for which the return under subsection (a) was required to be made. To the extent provided in regulations prescribed by the Secretary, this subsection shall also apply to persons required to make returns under subsection (b).
(e)Section does not apply to certain tips
This section shall not apply to tips with respect to which section 6053(a) (relating to reporting of tips) applies.
(f)Section does not apply to certain health arrangements
This section shall not apply to any payment for medical care (as defined in section 213(d)) made under—
(1)a flexible spending arrangement (as defined in section 106(c)(2)), or
(2)a health reimbursement arrangement which is treated as employer-provided coverage under an accident or health plan for purposes of section 106.
(g)Nonqualified deferred compensation
Subsection (a) shall apply to—
(1)any deferrals for the year under a nonqualified deferred compensation plan (within the meaning of section 409A(d)), whether or not paid, except that this paragraph shall not apply to deferrals which are required to be reported under section 6051(a)(13) (without regard to any de minimis exception), and
(2)any amount includible under section 409A and which is not treated as wages under section 3401(a).
(Aug. 16, 1954, ch. 736, 68A Stat. 745; Pub. L. 87–834, § 19(f), Oct. 16, 1962, 76 Stat. 1058; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 95–600, title V, § 501(b), Nov. 6, 1978, 92 Stat. 2878; Pub. L. 97–34, title VII, § 723(b)(1), Aug. 13, 1981, 95 Stat. 344; Pub. L. 97–248, title III, § 309(b)(1), Sept. 3, 1982, 96 Stat. 595; Pub. L. 98–369, div. A, title VII, § 722(h)(4)(B), July 18, 1984, 98 Stat. 976; Pub. L. 99–514, title XV, §§ 1501(c)(1), 1523(b)(2), Oct. 22, 1986, 100 Stat. 2736, 2748; Pub. L. 104–168, title XII, § 1201(a)(1), July 30, 1996, 110 Stat. 1469; Pub. L. 108–173, title XII, § 1203(a), Dec. 8, 2003, 117 Stat. 2480; Pub. L. 108–357, title VIII, § 885(b)(3), Oct. 22, 2004, 118 Stat. 1640; Pub. L. 111–148, title IX, § 9006(a), (b), Mar. 23, 2010, 124 Stat. 855; Pub. L. 111–240, title II, § 2101(a), Sept. 27, 2010, 124 Stat. 2561; Pub. L. 112–9, §§ 2(a), (b), 3(a), Apr. 14, 2011, 125 Stat. 36.)