If an LLC sends me a 1099 but I paid some of the money back to them, do I need to also send them a 1099?

Question

My wife, "Anne", is a Licensed Professional Counselor (LPC) in mental health. This past year she left her full time job as an employee of a local hospital to join a private practice, "XYZ Health, LLC". She signed an agreement whereby XYZ provides her with things like office space and supplies, software for charting and billing, advertising, leads for new clients, and the ability to accept certain health insurance, which she couldn't otherwise do on her own. In exchange for all of this, XYZ gets a cut of Anne's revenue (they refer to it as "dues"). On top of that, Anne must pay a per-session fee to one of the XYZ partners, "Beth", for professional supervision until she can get her full Licensed Clinical Professional Counselor (LCPC) license, as required by state law.

When Anne sees a client, the insurance company pays XYZ, and XYZ in turn writes a check to Anne. Now, I would have expected that XYZ would just automatically subtract out their dues and supervision fees, but that's not how they do it. Instead, they give Anne a check for the full amount, and then Anne has to write two checks back to them-- one to XYZ for dues, and a separate one to Beth for supervision. Kind of wonky, but fine.

So now tax time has come around. I normally use TurboTax for this, as our tax situation hasn't been too terribly complicated up to now. As part of the business portion, the software is asking whether Anne has paid anyone $600 as a contractor during the course of her business, presumably to determine whether a 1099 needs to be sent. I'm not sure how to answer this question.

XYZ has sent Anne a 1099-NEC for the full amount that they paid her without subtracting out the dues or supervision that Anne paid back to them. Anne has, conversely, paid more than $600 both to XYZ and to Beth. So, how does this work? Does she ultimately need to send 1099s to XYZ and/or Beth? Is this a common situation?

For the record, Anne contacted XYZ to ask about this and they said they didn't need a 1099 for either case, but I don't want to run afoul of any IRS rules by not sending them if I am required to do so.

Answer 1

This would definitely be worth asking an accountant about. But here is my unprofessional opinion.

You need to send a 1099-NEC or 1099-MISC to anyone that you pay more than $600 to over the year that is not a corporation. Given that, "Beth" would need to get a 1099-NEC from you. As for "XYZ Health, LLC," the rule is that if the LLC is taxed as a corporation, you do not give them a 1099, but if it is not taxed as a corporation, then you do need to give them a 1099.

The way you figure this out is to give them each a Form W-9 and have them fill it out and give it back to you. (Your wife probably filled out one of these for them when she started.) This form does not get sent to the IRS; it is just for your records. If it comes back to you with "Individual," "Partnership," or "LLC" (with a tax designation of "P") checked, then you do need to give them a 1099. Ideally, you would have gotten this form from them last year before you started paying them, so that you would know what you need to do. If you do need to give either of them a 1099, the W-9 will tell you what their SSN or EIN is, which you will need to fill out the 1099.

The deadline for issuing a 1099 to a payee is February 1, but the deadline for filing with the IRS is March 1 (or March 31, depending on how you file). This means that you have already missed the deadline for giving the form to your payees, but you have not yet missed the deadline for filing to the IRS.

There are penalties associated with failing to issue a required 1099 on time, and the penalties go up the more late you are.

One question that you may be asking yourself right now is this: How big a deal is this? If I am required to issue 1099s, but I skip it this year, and do it right next year, will the IRS care in this case? I really don't have an answer to that. Perhaps your accountant will have an opinion on that.

I'll make one final comment, as this is often misunderstood: Every business, including your wife, "Beth," and the LLC, needs to declare all of their income, whether or not they receive a 1099 for it. Sending or receiving a 1099-NEC does not affect your taxes in any way. The only thing it does is inform the IRS about payments that were made from one business to another. The only reason you would issue one is because you are required to. And, perhaps it goes without saying, but you (or your wife) are not responsible for ensuring that the other parties are doing their taxes correctly; you are only responsible to ensure that you are meeting your own legal obligations.

In conclusion: Ask your accountant how to proceed.