Subscriber Question #1:

We received a W-9 from a vendor. In box 3 they checked "Limited Liability Company and entered their tax classification as a "C-Corp". Is there anything we need to do to verify if they are a corporation before we decide not to 1099 report them?

TIR Answer Center Response:

An LLC is problematic for reporting purposes because it can register as a number of different entity types, making it difficult to identify when reporting is required. Especially problematic is the rare situation when an LLC indicates it is a corporation, and exempt from reporting. We say this situation is rare because the overwhelming majority of organizations classified as LLCs are truly not corporations.

That said, it is possible for an LLC to elect to file its taxes with the government as a corporation (doing so using Form 8832). However, if that is the case then they will get back a determination letter from the IRS affirming their corporate status for tax reporting purposes. And that's the key. This is because the documentation you rely upon to avoid 1099 reporting must constitute an "unambiguous indication" of exempt status. As such, to meet your IRS due diligence requirements you will want to get a copy of that determination letter. Moreover, you will want to verify that the vendor is not a domestic medical or legal service provider. Such entities are always reportable whether incorporated or not. Finally, you will also want to retain a copy of that completed W-9 for your files.

Subscriber Question #2: 

Do we have to 1099 report a consultant's travel expenses?

TIR Answer Center Response: 

When it comes to independent contractors the general rules for reimbursement follow the accountable plan framework. These rules state that the consultant must show a business purpose, provide substantiation of the expense (receipts), and return any excess amount. If this is the case (and all of that is documented), then you do not have to include the reimbursement in the gross reported. On the other hand the IRS states that you may report the amount.

Keep in mind that when dealing with contractors the IRS states you can report either with or without the reimbursement of business related expenses. The choice is yours. If you choose to not report these expenses then you will be required to adhere to the same guidelines as you would if these expenses were reimbursed to employees (meaning following the guidelines in IRS Publications 15, 15-B, and 463). Remember also that if any expenses are not documented, or if there is excess paid over the accountable amount, then you must include those expense amounts in the total amount reported.

Please note we advise that when it comes to reimbursing independent contractor business expenses you lump it all together, 1099 report all of it (including the reimbursed expenses), and let the contractor deal with it. They can deduct the reimbursed portion of the amount on their own tax return. Be consistent in this policy and you not only should find handling these issues to be easier, but you should cut down on the number of penalty notices or other negative interactions with the IRS arising from such situations.