I received 1099 and k1 from the same company. Is this ok?

[Marflore]

I was hired by a company for a couple of years as an independent contractor and received 1099 from the company. Around May of 2017, I bought the company so the company issued me k1. Basically, I received 1099 for the income I received before I bought the business and then received K1 after I took over the business. Would this be an issue with IRS? How an I explain this in TurboTax? 

[CathiM · Accepted solution]

This should not be an issue for the IRS.  Although business owners should not issue themselves 1099s (while they are owners), this shouldn't cause any problems with your return being e-filed or accepted by the IRS. Just keep your documentation to show the IRS if they ever question it. You have done things correctly, no need to be concerned.  I have seen business owners erroneously issue themselves a 1099-MISC and the IRS did not reject it or question it.  There is nowhere to notate this on your tax return and trying to add an explanation somewhere could cause the return to reject. 

[Kelly97]

I was interested to see you write that "Although business owners should not issue themselves 1099s (while they are owners)". Could you explain more about this?  Do you mean that business owners can't issue themselves a 1099 to report compensation for managing the LLC? 

I co-own an LLC and our Operating document expressly states that "(6) Compensation: Members shall not be paid as members of the LLC for performing any duties associated with such membership, including management of the LLC. Members may be paid, however, for any services rendered in any other capacity for the LLC, whether as officers, employees, independent contractors or otherwise."  Similar to the initial questioner, my partner and I both provided services as independent contractors before buying the business. We've continued to provide those service (having nothing to do with the management of the business) since purchasing the business though we do so in different proportions.  Separating compensation for these services from the 50/50 split for our ownership is essential to ensure fair compensation and distribution. 

Any further insight you could provide would be very helpful. 

Thanks, 

Kelly

[Vanessa A]

The compensation for your services should be reported as Guaranteed Payments on line 4a of the Scheduled K-1.  The payments are still deducted from the LLC income so only the partner or member receiving the payments are taxed on it.  

The LLC should not issue a member/partner a 1099. However, for the services you provided prior to buying into the partnership, you would have a 1099 for that period of time.  

[Gloriato08]

I'm in a similar situation.  I'm a partner in a real estate company (LLC) in which I am an independent contractor for the LLC.  The LLC sent me a 1099 NEC and K1.  The income reported on both is identical.  So if I file both, I'm basically showing that I received the same income twice.  Do I report both 1099 and K1 still?  Or is it OK if I just use my 1099?

[ThomasM125]

@Gloriato08 You do need to report both forms, as the IRS will look for them on your tax return. When you report the form 1099-NEC, just enter an expense, such as "commissions" to cancel out the income reported.

Your other alternative is to get the 1099-NEC corrected.

[Critter-3]

Get help from a local professional to get the books set up correctly, the partnership return done correctly and get educated on how this all works.   Normally the partnership would never 1099 one of the partners however if you have a separate business that does work for the partnership it could be issued a 1099 however that is an expense to the partnership and would not be reported on the K-1 at all ... so again seek local help to get this corrected. 

[Gloriato08]

Thanks for the quick reply!  Instead of entering an expense such as "commissions" to cancel out the income reported on the 1099-NEC, can you just do that on my K1 as an expense?

[Critter-3]

You cannot just change or add to the K-1 entries that are on the K-1 that is issued to you by the form 1065 ... the correction needs to happen at the partnership level ... seek local help please.