Updated October 28, 2020:

S Corp vs 1099

When comparing an S corp vs 1099, the two do not have to be mutually exclusive. The IRS requires companies to use 1099s on all employees working as independent contractors, but S corps come with certain restrictions and benefits. S corps are allowed to reduce self-employed taxes that are paid.

Small and large businesses use various contractors and service providers to accomplish certain tasks that a company cannot or will not do. Such tasks may include the following:

  • Strategic planning
  • Construction
  • Analysis
  • Streamlining operations

Mistaken Impressions

Many small business owners and others falsely believe that independent contractors work for less money and pay more in taxes. Such misconceptions stem from the following:

  • W-2 Employees: Many employers withhold self-employment taxes, and the employer pays half of those taxes, with the employee paying the remaining balance. Self-employment taxes are also called payroll taxes in the form of Medicare, Social Security, and FICA taxes. Therefore, W-2 employees do not see the full amount of taxes they are paying.
  • Employee Conversion: Employees may be surprised by much how much they’ll pay in taxes if he or she converts from a W-2 to 1099.

1099 Positives

The good thing is that 1099 workers will pay fewer taxes than the amount received through a W-2 status because of deductions. In addition, S corps are allowed to reduce self-employed taxes that are paid. The creation of a corporation may complicate tax filing procedures, but the added fees and complexities are worth it when considering the tax savings involved.

  • Note: To get the best out of an S corp and 1099, you should hire a tax professional who can guide you through the process.

According to the IRS, a 1099 employee is an actual business owner, meaning that he or she may deduct business expenses from the gross amount noted on the 1099 form. Such expenses may include:

  • Mileage
  • Home-based internet
  • Phone

Corporate Differences

The main difference between C and S corp 1099 reporting pertains to tax guidelines and how officers are designated. For instance, larger companies with many owners are usually created as C corps. The shareholders (owners) receive compensation, known as dividends, but only if the corporations choose such a structure.

C corps are taxed as live entities and pay federal, state, and local taxes on net income. A corporation may opt to pay shareholders via declaration and pay the dividends from post-tax net profits.

If a C corp opts to issue dividends, it may submit 1099-DIV documents to the IRS and shareholders. A 1099-DIV functions in the same way as a W-2, but it is reserved for independent contractors. Therefore, the IRS will exempt corporations, but will not apply the same exemptions for LLPs and LLCs.

Certain payments, such as those $600 in lawyer fees or cash expenses, mandate a 1099-MISC issuance. The following healthcare and medical costs over $600 to the following places also require 1099-MISC forms:

  • Medical facilities
  • Physician groups
  • Medical providers

Corporate Guidelines

C and S corps must submit and report non-employee pay that’s over $600 during a calendar using 1099-MISC forms. Also, part and full-time worker compensation must be reported to the payroll department, which is also responsible for withholding state, local, and federal taxes every time employees are compensated.

The mandates on corporations also pertain to S corp, which are corporations that choose an S status classification under IRS guidelines. In essence, S corps dodge double taxation associated with C corps. This is possible due to pass-through taxation, where losses and profits shift away from the business to shareholders to file on their personal tax returns.

Reporting Duties

The shareholders would then pay taxes based on his or her percentage in the company. For instance, take an S corp with five shareholders, where a sole person owns 60 percent, while the others own the remaining 10 percent. If the business made over a $20,000 net profit, the person owning majority shares adds $12,000 (60 percent) to his personal tax returns, and the others would add $2,000 (10 percent) to their tax returns.

  • Note: S corps business does not pay business taxes.

The IRS restricts shareholder numbers and stock classes, but such limitations do not affect an S corp’s treatment according to 1099 guidelines.

To learn more about an S corp vs 1099, submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s lawyers will explain the basics of 1099 issuance, and whether a W-2 or 1099 structure would be best for your business. In addition, they will provide assistance as you file taxes so you can take full advantage of S corp benefits.