Exemptions for 1099 Reporting: Understanding the “Eyeball Test” and Reportable Payments to Corporations

This article discusses the circumstances under which corporations are exempt from 1099 reporting. According to Regulation section 1.6049-4, an “eyeball test” can be used to determine whether the payee is a corporation and thus exempt from Form 1099 reporting. There are specific criteria that must be met for the “eyeball test” to be applicable. However, one area of exposure in using this process is that it does not identify whether the entity is a domestic or foreign corporation. When making U.S. source FATCA payments, a signed W-9 form is required to certify that the payee is a U.S. person and avoid the presumption that the payee is foreign. Finally, the article highlights some payments to corporations that are reportable on Forms 1099-MISC and 1099-NEC and notes that limited liability companies (LLCs) may be treated as corporations for W-9/1099 tax purposes if they file Form 8832.

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.”

FATCA Payments

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 FATA 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

  • Corporation
  • 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 the 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)

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 cards (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 “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.

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.

Best Practice

There are a lot of factors that go into determining 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.

In conclusion,

corporations may be exempt from 1099 reporting under certain circumstances, which are detailed in Regulation section 1.6049-4. The “eyeball test” can be used to determine whether a payee is a corporation and exempt from Form 1099 reporting. However, this test does not identify whether the corporation is domestic or foreign, which can be problematic for making FATCA payments. A signed W-9 form is required to certify that the payee is a U.S. person and avoid the presumption that the payee is foreign. Some payments to corporations are reportable on Forms 1099-MISC and 1099-NEC, such as medical and healthcare payments and attorney’s fees, among others. It is important to be aware of the different 1099 forms that exist, as payments to corporations may be reportable on other 1099 forms depending on the specific circumstances.

FAQ

Are corporations exempt from 1099 reporting?

The IRS regulations provide certain instances where an “eyeball test” can be applied to determine if a payee is a corporation and thus exempt from Form 1099 reporting.

What is the “eyeball test” under Regulation section 1.6049-4?

The “eyeball test” is the process of determining that the payee is a corporation by looking at the name of the vendor without obtaining a W-9 form, based on specific criteria.

How can payors treat a payee as a corporation under the “eyeball test”?

Payors can treat a payee as a corporation if the name of the payee contains an unambiguous expression of corporate status, there is a corporate resolution or similar document, or a Form W-9 includes an EIN and a statement from the payee.

What are FATCA payments?

FATCA payments are payments made to a corporation, insurance company, financial institution, broker, swap dealer, nominee, or custodian that require the payor to assume the payee is foreign.

How can companies avoid FATCA regulations?

Companies can obtain a signed W-9 form from the vendor certifying that they are a U.S. domestic corporation to avoid FATCA regulations.

What happens if companies do not receive a W-9 form for FATCA payments?

If companies do not receive a W-9 form for FATCA payments, they would be required to withhold 30% and issue a 1042-S form instead of a 1099 form.

Which payments to corporations are reportable on Forms 1099-MISC and 1099-NEC?

Some payments to corporations that are reportable on Forms 1099-MISC and 1099-NEC include medical and healthcare payments, attorney’s fees, gross proceeds to an attorney, fish purchases, substitute payments in lieu of dividends, and payments made by a federal executive agency.

Are payments to corporations reportable on other 1099 forms?

Yes, payments to corporations are also reportable on other 1099 forms, such as Form 1099-K for a payment card or third-party network providers, Form 1099-B for brokers, Form 1099-A for money lending businesses, and Form 1099-C for cancellation of debt.

Are limited liability companies (LLCs) treated as corporations for tax purposes?

LLCs may be treated as corporations for W-9/1099 tax purposes if they file Form 8832.

What should companies do to ensure accurate tax reporting for payments to corporations?

Companies should follow the IRS regulations and obtain the necessary forms and certifications, such as the W-9 form for U.S. domestic corporations, to ensure accurate tax reporting for payments to corporations.