MN withholding on 1099s

[Corduroy Frog]

The title comes from a recent thread so we can apply my question to Minnesota. I'm finding out, however, that other states have passed measures to pre-qualify 1099 recipients.

I'm trying to imagine what would happen should my state decide to get tough with 1099 situations. I believe this will occur at some point...and how the construction industry will react.

My question is can a worker escape 1099 withholding in Minnesota (and other states if applicable) if the worker becomes an LLC. In Tennessee, people are forming LLCs for everything. Natural springs on land. Barns. Vehicles. ...the list goes on and on. One of the reasons is that the LLC is incredibly easy to form and limits liability to separate targetable tangible values instead of broad ranges of assets. Our Secretary of State rubber-stamps these things like an automatic inkpad advance.

If forming a corporation, an agent for service (i.e. a human being) is required and this is the case in all 50 states. A corporate report must be filed every year, confirming the existence of the agent for service, and an address whereby this person can be found. The LLC does not require an agent for service.

The construction industry is saturated with people who are willing to work hard, but do not want to be identified for purposes of taxes, child support, court judgements, etc. If the LLC is off the hook, not only for 1099s but for withholding as well, I believe there will be a mass influx of LLC payments such that the escapism and non-accountability can be preserved. This is also not limited to the construction industry.

Minnesota is trying to slam the door on this. But do they leave a window open with the LLCs? If so, this could be a future issue, and not so far ahead of us.

[AJsTax]

Llc

We are treating single member LLCs that have not elected other status as sole proprietors. How can they not be if they are a disregarded entity for tax purposes? The new W-9 even has a place to mark which type of LLC they are and if they are marked as sole proprietor they get a 1099.
Now, we do not have to hold any taxes in Ohio. That might change the picture.
But at this point I do not believe that just being a LLC is any different than a sole proprietor for tax purposes, IF they have not elected corp status.

[Corduroy Frog]

1099-Misc Instructions

The 1099-MISC instructions exempt corporations from recipient status, but do not mention LLCs. I have always assumed an LLC would be treated as a corporation for this purpose, but don't know how much longer this would last if contractors and subcontractors started a mass proliferation of LLCs to avoid reporting.

[Black Bart]

Nothing to it.

We are treating single member LLCs that have not elected other status as sole proprietors. How can they not be if they are a disregarded entity for tax purposes?...

AJ:
Just get a good lawyer . Five years ago my sole prop client and his wife decided to become partners. Writing up a 3-page cookie-cutter LLC agreement for 700 bucks (my price-$100 & client did later say "Wish I'da come to you first), counselor elected "corporation" on the SS-4. I learned of all this at tax-time (had been curious about lawyer borrowing my LLC book months earlier) and told them he should have elected "partnership." Armed with this info they returned to his lair and he promptly proclaimed "Aw, it doesn't matter" (I mean, after all, it's not like I'm a lawyer!).

And there is stands today. I've filed five 1065s, but no 941s (all 1099 labor), so it hasn't come up. Probably should have corrected it myself, but I was miffed about that $700. Anyway, if it ever surfaces, I hope IRS sees it his way -- just a clerical error and not five years' late corp filings.

Originally posted by Corduroy Frog
...In Tennessee, people are forming LLCs for everything. Natural springs on land. Barns. Vehicles. ...the list goes on and on. One of the reasons is that the LLC is incredibly easy to form and limits liability to separate targetable tangible values instead of broad ranges of assets.

Hey C-Frog:
Thanks for the tip (hadn't thought of that). Do you happen to know if it's okay over here in your sister state? I've got a Dodge pickup that desperately needs coverin' (driven by an individual who thinks personal responsibility means keeping sufficient toilet paper on hand).

[AJsTax]

The 1099-MISC instructions exempt corporations from recipient status, but do not mention LLCs. I have always assumed an LLC would be treated as a corporation for this purpose, but don't know how much longer this would last if contractors and subcontractors started a mass proliferation of LLCs to avoid reporting.

I have done quite a bit of research on this and I feel that a LLC is NOT an exempt entity unless they have elected corporate status. Look at the new W-9. The LLC section has three choices. If they select any other than corporation they should get a 1099. LLC stands for limited liability company, not corporation. Also we must remember that the LLC statutes are different in each state, but most used a very similar definition to set them up.
In this case we are talking about IRS rules on reporting income and as such all sole proprietors must receive a 1099 if the amount is high enough. And remember, although I am sure most don't , that includes the accountant and tax preparer if they are not incorporated.
To sum it up, all LLCs get a 1099 unless they have elected to be taxed as a corporation.

[Snaggletooth]

for AJ - not Ohio

Thanks for the benefit of your response, and your approach to LLCs in your state.

For tax purposes, any LLC under Tennessee law is treated as a corporation. However, TN does not require a 1099 for their purposes, so the question is limited to Federal 1099s.

This highlites the differences between states, and particularly Tennessee's goofy taxation. As you may know, there is no general income tax on individuals in TN, therefore most all other taxes are higher than our neighbors. The "wave" of LLCs began in the 1980s, and originally, LLCs were exempted from corporate tax. Idiots. They should have known what was coming.

Almost immediately, some of Tennessee's most profitable corporations began to change their charter from corporations to LLCs. You might know some of Tennessee's corporations, they include a few big ones such as Federal Express and Cracker Barrel.

Imagine the loss of revenue to the state. The TN legislature, in a hastily-called session, changed the corporate tax law in a matter of only hours, so that now LLCs are fully taxable as corporations.

All of this is beside the point to the original issue, but it might explain why we consider LLCs to be "Limited Liability Corporations" in Tennessee for tax purposes.

[Bees Knees]

My question is can a worker escape 1099 withholding in Minnesota (and other states if applicable) if the worker becomes an LLC.

The answer is yes. The 1099 withholding only applies to Individual Independent Contractos. A single member LLC is not considered an Individual Independent Contractor for purposes of the withholding rule requirements. That single member LLC is still a sole proprietor and files Schedule C if he/she has not elected to be taxed as a corporation. That single member LLC should also receive a 1099-MISC for work performed. However, for MN withholding purposes, the single member LLC is not considered an Individual Independent Contractor.