1099s to LLCs

[Edsel]

The LLC craze continues. Lawyers tout this as all the protection of a corporation and none of the paperwork problems.

Found out from some of my clients in the construction industry: various subcontractors and construction workers are now forming LLCs just so they will not receive a 1099. In my state, an LLC is deemed to be a corporation for tax purposes, so I don't send them one.

However, I'm not aware of anything in the IRS regulations for issuers of 1099s which exempts LLCs from receiving a 1099-MISC for services rendered.

Comments or corrections??

[Gretel]

I agree with you. LLC's are not corporations so they are not exempt from 1099 reporting requirements.

[JohnH]

I have a client who uses hundreds of sub-contractots (legally) and insists on a W-9 from every one of them, so we go around this block regularly. The latest verson of the W-9 (Rev. October 2007) has a line for LLC's, and also a place to check their "tax classification". I think this line has been added precisely to address the confusion over whether or not LLC's should receive 1099's.

If they check the LLC box, then they must enter an entity code or else the client sends it back to them for clarification. Anyone entering the "C" tax classification code is entered in the system as not 1099-eligible, whereas anyone entering the "D" or "P" classificaton is 1099-eligible if they exceed the $600 threshhold. The client won't do business with any LLC that fails to provide the entity code until they clear up that issue.

[DaveO]

I have started to advise clients to obtain an EIN for their LLC even if not required just to keep their SSN off of 1099’s either given or received. I do this not only because of identity theft concerns but I’ve seen the IRS treat an SSN used to issue a 1099 as an EIN with less than humorous results.

The use of the LLC/EIN to avoid 1099 reporting would be easily avoided by requiring 1099 forms for all payments for services in excess of $600.

[Jesse]

I advise my clients to require completed W-9's before paying out any monies. This way if a sub says they are a corporation you have the W-9 to back it up.

I agree also LLC's require 1099MISC unless elected the classification of a Corporation and as pointed out this is addressed on the W-9 forms, so again completed W-9's from all subs are a good idea.

I think much of the confusion is from people assuming the LLC to stand for Limited Liability Corporation instead of the correct Limited Liability COMPANY.

[Edsel]

John You're Lucky

The client won't do business with any LLC that fails to provide the entity code until they clear up that issue.

John, you're lucky to have a client like this. The status quo over in my neck of the woods writes checks galore to any and all comers, then at the end of the year has to chase to down these people and get their numbers. Of course, then there are always people they can't find, or who refuse to give out their numbers. I tell them the best way to avoid this is to get their number before they ever write the first check.

This shouldn't be news to anyone, but there is a massive black market for unreported labor. There are scads of workers (scads -- is that a word?) who will work for $5/hr. under the condition that a 1099 is not issued, for a job that could not be performed for less than $10/hr under conventional circumstances. The reasons are multifold. Some of them are on disability and don't want to lose it. Others don't want to file taxes. Others don't want to show income because they're avoiding child support.

The people who employ others under this condition are aware that they can't show the labor as a deduction without risk. But the economic advantage of working someone for next to nothing is more than they can resist. The fact that they are foregoing the deduction makes it appear fair, but they are still breaking the law.

[JohnH]

Understood. And in the interest of full disclosure, don't take my comments to mean that ALL my clients act in the same manner as this particular client. (Wouldn't want to mislead anyone).

[BHoffman]

Years back, I had a client who paid a couple of teenage neighborhood boys under the table for some work. No citizenship or green cards. Paid them about half the market rate.

He ended up recording the payments made to them as drawings.

[Bucky]

I read somewhere IRS is going to make 1099 reporting for corps mandatory I think starting in 2010. They also are want taxpayers such as rental owners to file 1099's for anyone they pay more than $600. I think i read this in the Kiplinger letter.