A limited liability company, also called an LLC, uses an IRS Form 1099-MISC to meet its federal employment tax obligations when working with independent contractors. The form is a summary of payments made to the contractor during the course of a year.
It is part of a series of IRS forms that enables the agency to track payments made to independent workers so it can make sure they pay taxes on income as required by law.
An LLC can hire two types of workers: employees and independent contractors. Employees are the company's permanent individual workers. Independent contractors can be individuals or other companies that work for the LLC on a temporary or project-specific basis. The most important distinction between the two groups is how the LL handles each for the purposes of collecting federal employment taxes. The LLC must deduct income taxes from employee wages and remit the amounts to the IRS. Independent contractors, conversely, are responsible for paying their own income taxes.
The IRS requires businesses to collect certain information from independent contractors and to report amounts paid if the total exceeds $600 a year. By requiring the company to report the amounts paid to an independent contractor, the IRS ensures that the contractor is accountable for that income on a tax return and pays taxes on it eventually. The IRS takes the independent contractor process very seriously. The agency is particularly concerned with ensuring that workers are correctly classified as either employees or contractors, and that the proper information is being transmitted to enable the agency to collect taxes on all income.
The process for managing annual tax obligations for contractors requires three forms: the IRS W-9 the Form 1096 and the Form 1099-MISC. The W-9, Request for Taxpayer Identification Number and Certification, is provided by the contractor to the LLC when the contractor is hired and lists the contractor's employer identification number, business name and address. The LLC keeps the W-9 on file. The Form 1096, Annual Summary and Transmittal of U.S. Information Returns, is prepared by the LLC, lists all contractors paid $600 or more that year and is sent directly to the IRS. The company then sends each contractor a Form 1099-MISC, Miscellaneous Income, that summarizes payments made to the contractor so the amount can be included on the contractor's federal income tax return.
The Form 1099-MISC is the contractor's version of the W-2 that employees receive every year to detail their wages earned and taxes paid. The form lists income but no tax withholding. This is in line with the contractor's independent status and reflects his obligation to pay taxes on income himself. Contractors that fail to pay taxes on their income as required are subject to audit and expose their clients to similar scrutiny when the IRS starts to investigate. It is considered a best business practice not to hire anyone as an independent contract who does not have a working business structure in place to properly meet tax obligations.