S Corp and 1099 Requirements: Exceptions, Deadlines, Penalties

An S corporation’s 1099 requirements come in two directions: the forms it must issue to outside payees, and the far shorter list of forms it will receive. For payments made during 2026, your S corp must issue a Form 1099-NEC or 1099-MISC to most non-corporate individuals and businesses you paid $2,000 or more for services, rent, or other reportable categories, with special rules for attorneys, medical providers, and your own working shareholders.¹

The threshold matters because it changed. Payments made after December 31, 2025 use a $2,000 floor for most 1099 categories, up from the long-standing $600. The change came through amendments to Internal Revenue Code Sections 6041 and 6041A, and the figure will index for inflation starting in 2027.¹ Two categories didn’t move: royalties still report at $10, and gross proceeds paid to attorneys on Form 1099-MISC still report at $600.

When Your S Corp Must Issue a 1099-NEC

Form 1099-NEC reports nonemployee compensation. Four conditions must all be true before you owe one:²

The recipient is not your employee.
The payment was for services performed in your trade or business.
The recipient is not a corporation (with the exceptions below).
You paid that recipient $2,000 or more during the year.

Freelancers, consultants, and subcontractors are the typical payees. Payments for physical products or merchandise don’t count.³ If any one of the four conditions fails, no 1099-NEC is required. A designer you paid $1,800 in 2026 gets no form; the same $1,800 in 2025 would have triggered one.

When Your S Corp Must Issue a 1099-MISC

Form 1099-MISC covers non-service payments. Your S corp files one when it pays $2,000 or more to a single payee during the year for rent, prizes and awards, medical and healthcare services, crop insurance proceeds, or other listed miscellaneous income.⁴

Two thresholds sit outside the $2,000 rule. Royalty payments trigger at $10 or more. Gross proceeds paid to attorneys as part of a legal settlement (distinct from fees for legal services your business hired) go on 1099-MISC Box 10 at $600 or more.¹

The Corporate Exemption and Its Exceptions

Payments to any entity that identifies itself as a C corporation or S corporation on Form W-9 are generally exempt from 1099 reporting. Hire an incorporated IT firm that checks the “S Corporation” box on its W-9, and you owe them no 1099.⁵

Two exceptions override the corporate exemption and catch many S corp owners off guard:

Attorney fees of $2,000 or more must be reported on Form 1099-NEC even when the law firm is incorporated. Gross proceeds paid to attorneys of $600 or more go on Form 1099-MISC regardless of the firm’s entity type.¹
Payments of $2,000 or more to a physician, medical corporation, or other healthcare provider must be reported on Form 1099-MISC even when the provider is incorporated.¹

When Your S Corp Receives a 1099

The corporate exemption works in your favor on the receiving side. Most clients who hire your S corporation for services are not required to send you a 1099-NEC; your income already reports on Form 1120-S and flows through to shareholders on Schedule K-1.⁶

The same two exceptions apply in reverse. If your S corp provides legal services, clients must send you a 1099-NEC for fees of $2,000 or more. If your S corp provides medical or healthcare services, clients must send you a 1099-MISC at the same threshold. Separately, if your S corp is paid through a third-party settlement organization such as a payment app or credit card processor, those transactions get reported on Form 1099-K when total payments exceed $20,000 across more than 200 transactions.⁷

Paying Shareholders: W-2, Not 1099

This is where S corp owners get into the most trouble. If you’re a shareholder who provides more than minor services to your S corporation, the IRS considers you an employee. Your compensation must run through W-2 payroll, not a 1099-NEC.⁸

The structural appeal of the S corp is that after a reasonable W-2 salary, remaining profits distribute to shareholders free of FICA (the combined 15.3% for Social Security and Medicare, with Social Security applying to wages up to $184,500 in 2026).⁹ Setting the W-2 salary artificially low to route more money through distributions is the fastest way to trigger an audit.

The IRS doesn’t publish a formula for reasonable compensation, but it does list the factors it weighs: training and experience; duties and responsibilities; time and effort devoted to the business; comparable pay for similar work at similar businesses; the ratio of distributions to salary; and whether compensation was set by written agreement before the work was performed.¹⁰ The practical test: if you replaced yourself with a non-owner employee, what would you have to pay them? That’s your floor.

If the IRS decides the W-2 salary was too low, it can reclassify distributions as wages. That reclassification triggers both employer and employee shares of FICA on the reclassified amount, plus interest and penalties for the payroll returns and deposits that weren’t filed. The combined bill regularly exceeds what the shareholder was trying to avoid.

Collect W-9s Before You Pay

Before you pay any contractor or vendor, get a completed Form W-9. It gives you the payee’s legal name, taxpayer identification number, and entity type, which together determine whether a 1099 is required and how to fill it out.¹¹ Most 1099 headaches start with an S corp scrambling in January to collect W-9s from vendors it paid all year. Collect the form before the first payment goes out.

If a payee refuses to give you a TIN, or gives one the IRS flags as incorrect, you must withhold 24% of each payment and send it to the IRS as backup withholding.¹² When the IRS sends a CP2100 or CP2100A notice listing mismatched TINs, you send the payee a “B notice” and, if they don’t respond, begin backup withholding within 30 business days of the IRS notice.¹³ Backup withholding gets reported on Form 945, separate from the regular payroll returns on Form 941.¹⁴ Miss this step and you owe the withheld amounts whether you actually withheld them or not.

Filing Deadlines

The two main forms have different deadlines, and confusing them is an easy way to draw penalties.

Form 1099-NEC: recipient copy and IRS copy both due January 31, whether you file on paper or electronically. For 2026 payments, that’s January 31, 2027.⁵

Form 1099-MISC: recipient copy due January 31; IRS copy due February 28 on paper or March 31 if filed electronically.⁵

Penalties for Late or Missing Forms

Penalties scale with how late the form is:

Filed within 30 days of the deadline: $60 per form.
Filed after 30 days but by August 1: $130 per form.
Filed after August 1, or never filed: $340 per form.

These penalties apply separately for failing to file with the IRS and for failing to furnish a copy to the recipient, so a single missed form can generate two penalties.¹⁵ If the IRS treats the failure as intentional rather than an oversight, the minimum jumps to $680 per form with no annual cap.¹⁶ Ten missed 1099-NECs after August 1 can mean $6,800 before interest, and that assumes the IRS accepts it as unintentional.

Electronic Filing Threshold

If your S corp files 10 or more information returns of any type during the year, you must file electronically. The count aggregates across form types, so four 1099-NECs plus six 1099-MISCs hits the threshold.¹ The IRS offers a free web portal, the Information Returns Intake System (IRIS), which lets you enter data manually or upload a CSV file. You’ll need a Transmitter Control Code from the IRS before using it.¹⁷

State Filing Is Separate

Filing 1099s with the IRS doesn’t automatically satisfy state obligations. Some states participate in the Combined Federal/State Filing Program, which forwards federal 1099 data to participating state tax agencies, but participation varies by state and by form type. Most states won’t accept the federal filing as sufficient when state income tax was withheld from the payment. Check with your state tax agency before assuming the federal filing covers you.

1
Internal Revenue Service. 2026 Publication 1099 – General Instructions for Certain Information Returns
2
Internal Revenue Service. Form 1099-NEC and Independent Contractors
3
Internal Revenue Service. Reporting Payments to Independent Contractors
4
Internal Revenue Service. About Form 1099-MISC, Miscellaneous Information
5
Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC
6
Internal Revenue Service. Am I Required to File a Form 1099 or Other Information Return
7
Internal Revenue Service. IRS Issues FAQs on Form 1099-K Threshold
8
Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers
9
Social Security Administration. What Is the Current Maximum Amount of Taxable Earnings for Social Security
10
Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
11
Internal Revenue Service. Forms and Associated Taxes for Independent Contractors
12
Internal Revenue Service. Backup Withholding
13
Internal Revenue Service. Understanding Your CP2100 or CP2100A Notice
14
Internal Revenue Service. Instructions for Form 945
15
Internal Revenue Service. General Instructions for Certain Information Returns (2025)
16
Internal Revenue Service. Information Return Penalties
17
Internal Revenue Service. E-file Information Returns With IRIS