Are corporations exempt from 1099 reporting?
When are corporations exempt from 1099 reporting? I worked as a controller for both large and midsize companies and we typically just eliminated payments to incorporated vendors from our 1099-MISC filing unless the payments were for medical or attorney services. However, I never fully understood when payments to corporations were 1099 reportable or when I could assume a vendor was a corporation without a W-9 form. And there are many instances where a corporation is not exempt!
Regulation section 1.6049-4 eyeball test
This regulation provides specific instances where an “eyeball test” can be applied to determine that a payee is a corporation and possibly exempt from Form 1099 reporting. The “eyeball test” is simply the process of determining that the payee is a corporation from looking at the name of the vendor without obtaining a W-9 form.
Absent actual knowledge, otherwise, a payor may treat a payee as a corporation (and, therefore, as an exempt recipient) if one of the requirements below is met.
- “The name of the payee contains an unambiguous expression of corporate status that is Incorporated, Inc., Corporation, Corp., P.C., (but not Company or Co.) or contains the term insurance company, indemnity company, reinsurance company, or assurance company”
- “The payor has on file a corporate resolution or similar document clearly indicating corporate status. For this purpose, a similar document includes a copy of Form 8832, filed by the entity.” This is typically an LLC electing to be treated as a corporation.
- “The payor receives a Form W-9 which includes an EIN and a statement from the payee that it is a domestic corporation.”
Conclusion: There are instances where the “eyeball test” can be used to determine that the payee is a corporation. However, there are some dangers with this that we will discuss next.
For additional information see IRS regulation Section 1.6049-4(c)(1)(ii)(A)
One area of exposure in using the “eyeball test” is that this process doesn’t identify whether the entity is a domestic or foreign corporation. When a vendor signs a W-9 form they are certifying that they are a U.S. domestic corporation and, therefore, FATCA regulations don’t apply. We recommend that you obtain a W-9 form for any FATCA payments that your company makes to identify foreign entities that might fall under FATCA regulations.
What is FATCA? When making U.S. source FATCA payments (typically payments from lending and investment activities, cash value insurance contracts and annuities) to a
- Insurance company
- Financial institution
- Brokers, swap dealers, nominees, and custodians
FATCA regulations require the payor to assume the payee is foreign. A signed W-9 form certifying that the payee is a U.S. person overcomes this presumption. FATCA does not apply to U.S. vendors.
If you do not receive a W-9 form, you would be required to withhold 30% and issue a 1042-S form instead of a 1099 form. Make sure not to include FATCA payments in your “eyeball test”.
Although most payments to corporations are not 1099-MISC and 1099-NEC reportable, there are some exceptions.
Certain payments to corporations are reportable on Forms 1099-MISC and 1099-NEC. This includes:
- Medical and healthcare payments (1099-MISC, Box 6)
- Attorney’s fees (1099-NEC, Box 1)
- Gross proceeds to an attorney (1099-MISC, Box 10)
- Fish purchases (1099-NEC, Box 1)
- Substitute payments in lieu of dividends for tax-exempt interest of $10 or more (Box-1099, Box 8)
- Payments made by a federal executive agency to a corporation for services (1099-NEC, Box 1)
For additional information see the 2020 Instructions for Forms 1099-MISC and 1099-NEC .
Payments to corporations are also reportable on other 1099 forms.
Also, be aware that there are 20 different 1099 forms. Many of these forms note certain payments to corporations that are reportable on a 1099 form.
- Payment card or third-party network providers – Payments made in settlement of payment card (credit cards are included here) or third-party network transactions to corporations (Form 1099-K)
- Brokers – Any sale of a covered security acquired by an S corporation (other than a financial institution) after 2011 (Form 1099-B)
- Money lending businesses – Acquisition or abandonment of secured property related to a corporation (Form 1099-A)
- Cancellation of debt – Cancellation of debt in excess of $600 owed to you by a corporation (Form 1099-C)
- Brokers and barter exchanges – Barter exchange transactions (Form 1099-B)
Are limited liability companies considered a corporation?
Are limited liability companies considered corporations exempt from reporting? LLCs are not a corporation when they are initially formed. However, if they file one of two specific forms and the IRS accepts it, they are treated as a corporation by the IRS for W-9/1099 tax purposes.
- Form 8832 – Filed to select C corporation tax treatment
- Form 2553 – Filed to select S corporation tax treatment
If your vendor or independent contractor checks LLC on the W-9 form and then writes in “C” or “S” later on that same line, they are saying that they have filed one of these two forms. However, LLCs that write in “P” as the LLC type are not treated as corporations and are considered a partnership for tax purposes by the IRS. Single-member LLCs that have not filed either of these forms are disregarded for tax purposes. See our blog “How should an LLC fill out a W-9 form correctly? SSN vs EIN” for more information.
Be aware, however, that LLCs often get this wrong on their W-9 form and many LLC’s think they are Limited Liability “Corporations.” LLC actually stands for Limited Liability Company (not corporation) and as we established above, the LLC has to file specific forms to be treated as a corporation. It is helpful to review W-9s closely from LLCs to make sure they include the LLC letter and make sense.
There are a lot of factors that go into determine when corporations are exempt from 1099 reporting. Our recommended best practice is to always request a W-9 form from your vendors before making any payment.