I am the president and sole employee of an S Corporation that provides custom software development services. I recently signed a corp-to-corp contract that says I will provide my services for a specified hourly rate.

The other corporation just sent me an IRS Form W-9. It looks pretty straightforward, except for that little "Exempt payee" check box.

I'm thinking that I should leave it unchecked because, while I am doing business through a corporation and I have never been notified that I am subject to backup withholding, S Corporations do not appear to be explicitly exempted from backup withholding. At some point in the future, I suppose it is possible that I would be subject to backup withholding (just guessing).

Should I check it? Should I leave it unchecked?

I'm leaning toward unchecked, but I appreciate any guidance you can provide.

asked 16 Feb '11, 05:21

Jon%20Sagara's gravatar image

Jon Sagara
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If the W9 is requesting your S Corp name and EIN and NOT YOUR personal SS# (and your name), then technically they did not have to send your S Corp a W9 for a C or S Corporation will not receive a 1099. So do not check that "Exempt Payee" box. Just enter the corporation's EIN, sign and date and send back to the corporation that sent it to you.

Obviously that corporation wants to be safe - overly safe.

Diane Offutt, EA, MAcc Accounting Connections, LLC Woodstock, GA 30189

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answered 16 Feb '11, 06:16

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dianeoffutt EA
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I recommend that all my clients send all their vendors, even their corporate vendors, Form W-9 to complete such that my clients have it on file that they are not required to send a Form 1099 to that vendor.

Some entities, including corporations, are exempt from backup withholding. Some are only exempt from withholding for certain types of payments. Not being subject to backup withholding is not the same thing as being exempt from backup withholding.

The IRS does a pretty good job of notifying you if you are subject to backup withholding, so if you haven't been notified, you don't owe back taxes, you're a U.S. citizen, then are probably not subject to backup withholding.

Individuals, sole proprietors, partnerships and S-Corporations are generally not "Exempt Payees" and these entities should not check that box.

Please see the instructions for Form W-9 and ask your tax professional if you are not sure.

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answered 16 Feb '11, 21:53

Gina%201's gravatar image

Gina 1
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For this purpose, a corporation is a corporation. I did not see any distinction for this purpose between a C-Corp and an S-Corp. This type of payment, if otherwise reportable, would be reported on Form 1099-MISC - generally corporations are exempt from backup withholding depending on the type of payment. Certain payments to corporations are reportable - depends on the type of payment - in the case of Form 1099-MISC:

"Reportable payments to corporations. The following payments made to corporations generally must be reported on Form 1099-MISC. Medical and health care payments reported in box 6. Fish purchases for cash reported in box 7. Attorneys’ fees reported in box 7. Gross proceeds paid to an attorney reported in box 14. Substitute payments in lieu of dividends or tax-exempt interest reported in box 8. Payments by a federal executive agency for services (vendors) reported in box 7." (Instructions for Form 1099-MISC)

Starting with payments in 2012, unless the law changes (everyone - ie the President, the Republicans, the Democrats, the Tea Party, and the IRS - seems to want that particular bit of legislation repealed, but can't seem to agree on who should get credit for taking that legislative action - grin), payments to corporations will be reportable and, with that, be subject to BU WH.

BU WH applies if a payee fails to provide its Tax ID or provides an incorrect ID or fails to notify the payer that it is not subject to BU withholding.

So this is not a case of an payer wanting to be overly safe - this is a case of a payer wanting documentation that a payee is a corporation and is not subject to BU WH for the particular type of payment it is receiving. This is simply due diligence.

If a payer does not get Form W-9 (or substitute) from a payee and it turns out the payee is subject to BU WH, the payer becomes liable for the amount it should have withheld (currently 28% of the gross) because the payee did not provide the required information.

BTW - I have a colleague who worked for large payers - he considered the IRS a vendor (A/P made payments to the IRS - mainly WH payroll, income, and excise taxes) and would send a W-9 to the IRS - and they would send it back signed and with the appropriate boxes checked.

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answered 17 Feb '11, 05:51

Pat%20Haggerty's gravatar image

Pat Haggerty
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A similar question came up last year and I contacted the IRS. Their response was that when the instructions were originally written, there was no such thing as an S Corp. Corporation referred to a nonflow-through entity so currently only a C Corp would qualify as not requiring a 1099MISC. But if I got another IRS rep when I called, I could have gotten a different answer.

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answered 17 Feb '11, 17:07

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Carol 2
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Page 3 of the W-9 instructions includes 'A corporation' in the list of 'Exempt Payees'. It does not specify 'C' corp or 'S' corp which in my mind implies that it applies to both of them. Does someone know a source that indicates that an 'S' corporation is not an 'Exempt Payee'?

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answered 17 Feb '11, 01:32

John%20DiLucci%20-%20EA's gravatar image

John DiLucci...
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Pat:

You are on point except for one minor detail

Our real estate landlords will be filing 1099-MISC's for 2011 (due at IRS 2/28/2012).

While I am not sure if this "goody" is from the healthcare law (are we not lucky!!! -grin!) our landlord clients may still be stuck with this point. One problem is the individual who first sees us in March and later (extensions?) and we are unable to generate the 1099-MISC in a timely manner (and how do we bill and COLLECT for the additional time?)

While Congress can't figure out who wants the prestige of eliminating this onerous small business provision, many of our professional organizations are also in favor of the repeal of the corporate 1099-MISC reporting including the National Conference of Certified Public Accountant Practitioners as well as the AICPA and various state CPA societies.

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answered 17 Feb '11, 06:31

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drothtax
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Hello Carol, If the IRS staffer said that - well - it is ridiculous - A corporation is a creature of state law - you cannot apply to become an S-Corp with any state that I know of. S-Corp is a federal tax designation used to apply particular tax rules to corporations which meet certain requirements. That is, the organizers apply for a state corporation charter and after getting that, apply to the IRS for S-Corp status. Similarly, an LLC (also a creature of state law and not recognized as a federal tax entity other than as a disregarded entity or a partnership, or if it elects, a corporation) that elects corporation status is treated as a corporation for all federal tax purposes. The C-Corp/S-Corp thing is sort of like applying different rules to individuals who are married filing jointly and married filing separately - they are still individuals (natural persons).

As to the instructions - could be referring to a regulation - but then if Congress had intended for an S-Corp to be treated differently for Section 6041 purposes, that would have been written into the code with the S-Corp rules or the IRS would have revised the regulations. In any event, the instructions on Form W-9 and for requestors of Form W-9 still read "corporation" and they were both most recently revised as of Jan 2011.

Hi John, I don't think we will find anything - the code (and the IRS) usually do not mention exceptions that do not exist - the exception for corporations is not in the code, but in Regulation 1-6049-4 - specifically, 1-6049-4(c)(1)(ii)(A) - The wording in the heath care legislation is

"SEC. 9006. EXPANSION OF INFORMATION REPORTING REQUIREMENTS.

  (a) In General- Section 6041 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsections:

  `(h) Application to Corporations- Notwithstanding any regulation prescribed by the Secretary before the date of the enactment of this subsection, for purposes of this section the term `person' includes any corporation that is not an organization exempt from tax under section 501(a).

  `(i) Regulations- The Secretary may prescribe such regulations and other guidance as may be appropriate or necessary to carry out the purposes of this section, including rules to prevent duplicative reporting of transactions.'.

  (b) Payments for Property and Other Gross Proceeds- Subsection (a) of section 6041 of the Internal Revenue Code of 1986 is amended--

        (1) by inserting `amounts in consideration for property,' after `wages,',

        (2) by inserting `gross proceeds,' after `emoluments, or other', and

        (3) by inserting `gross proceeds,' after `setting forth the amount of such'.

  (c) Effective Date- The amendments made by this section shall apply to payments made after December 31, 2011."

Note the "Not withstanding any regulation prescribed by the Secretary before the date of the enactment...." because Code section 6041 reads "person" and the definition of "person" in Section 7701(a)(1) includes "corporation" while Section 7701(a)(3) clarifies the term corporation by specifically including "associations, joint stock companies, and insurance companies.

Hello drothax - I'm not sure how I was "not on point" on the landlord issue - we were discussing whether an S-Corp is a Corporation for Form W-9 and exemption from being a recipient for Section 6041 reporting purposes. Congress, in the Small Business Jobs Act of 2010 (Sept 2010) chose to include landlords, with some notable exceptions, as "persons engaged in a trade or business" for purposes of being a payer for Section 6041 reporting because the passive loss rules sort of say they are not so engaged. There is precedent for this as governmental entities and not-for-profit organizations are also considered payers engaged in a trade or business for Section 6041 reporting purposes as well. Landlords have been considered payees for Section 6041 purposes as evidenced by box 1 on Form 1099-MISC. For example, my business issues a 1099-MISC to its landlord, which is an LLC (non-corp). It is a completely separate issue from the PPACA (health care act) provision expanding the types of payees and payments to be reported as it deals with who is required to report.

When I first saw the PPACA provision, my first thought was "there is no way this will get to 2012 in once piece - there are too many ways for this to be blunted and enough time for that to happen, even without repeal. First there is the clause about duplicate reporting and the 1099-K reporting for payment card payments. Then there is the SBA mandate to review legislation and regulations for impact on small business and take action where there is significant adverse impact. Then there is the IRS which does not have the resources to handle the additional reporting - they don't want it either and Congress does not want to fund it.

I heard (pure hearsay - I got it from a semi-reliable source who claims to have gotten it from a primary source who should be in a position to know) that the PPACA provision was a Republican idea - believable because of the rule enacted in 2004 requiring governmental entities to withhold 3% on ALL payments to ALL contractors (with some exceptions, of course, and the start date kicked down the road a few times - probably for funding reasons) and the 2008 card payment reporting rues were similar provisions related to Form 1099-MISC payments inserted to help pay for legislation by reducing the tax gap. Afer all, the tax gap is large and additional information return reporting and backup withholding would seem likely to reduce it. So the PPACA provision seems a natural progression in the series - however, it is so outrageous that it is possible that it was intended to be a poison pill for health care reform. That it was never actually intended to go into effect.

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answered 19 Feb '11, 20:35

Pat%20Haggerty's gravatar image

Pat Haggerty
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Asked: 16 Feb '11, 05:21

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Last updated: 19 Feb '11, 20:35