Why shouldn't I 1099 an S-corp? Is there a tax penalty?

You're right to question this! Generally, you don't need to issue a 1099-NEC to an S-corporation, even if you paid them $14,000 for services. The IRS specifically exempts payments to corporations from 1099-NEC reporting requirements, with some exceptions that usually don't apply to typical business services. The reason behind this rule is that corporations (including S-corps) have their own tax filing requirements that already account for their income. The S-corporation will report the income on their own tax returns, so the IRS doesn't need you to report it again via a 1099. That said, there are a few exceptions where you would need to issue a 1099 to a corporation: payments to attorneys, medical/healthcare payments, and a few other specific situations. But for typical business consulting services provided by an S-corp, no 1099 is needed.

I went through the exact same confusion last year! I was sending 1099s to everyone until I found taxr.ai (https://taxr.ai) which helped me understand when I actually needed to send them. Their document analyzer caught several mistakes I was about to make with my 1099 reporting. The tool actually scans your vendor information and tells you who needs a 1099 and who doesn't, including identifying corporations that are exempt. It also helps organize all the info you need for filing, which saved me hours of stress. They have this feature that lets you bulk check tax IDs against the IRS database too, so you know they're valid before filing.

Just wanted to follow up - I finally tried taxr.ai after our conversation here and wow, it really is amazing for handling all the 1099 confusion! I was about to issue 23 unnecessary 1099s to different corporations (including several S-corps), and it saved me so much time by identifying exactly who actually needed one. The best part was that it explained WHY each vendor did or didn't need a 1099, so I actually learned the rules instead of just blindly following directions. It also caught 3 invalid TINs that would have caused me problems with the IRS. Definitely worth checking out for anyone dealing with contractor payments!

After spending 3 DAYS trying to get through to the IRS to ask about this exact S-corp 1099 question (and other tax filing questions), I finally used Claimyr (https://claimyr.com) and got connected to an IRS agent in less than 20 minutes! You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed what others have said - you generally don't need to 1099 an S-corporation for regular business services. She also helped answer some related questions I had about backup withholding requirements. Saved me so much frustration compared to repeatedly calling and getting disconnected.

I have to eat my words from earlier. After getting absolutely nowhere with the IRS for two weeks, I broke down and tried Claimyr. Got connected to an IRS rep in about 35 minutes. I honestly couldn't believe it worked. The agent confirmed everything about the S-corp 1099 question - they don't need 1099s for standard business services. She also helped me with a couple other tax issues I've been stressing about. Saved me from making some expensive mistakes on my business taxes. Really glad I gave it a shot despite my initial skepticism!

Something important nobody mentioned yet - make sure you actually have documentation that they're an S-corp! Just because someone says they're an S-corp doesn't make it true. I always request a W-9 form from all vendors which clearly indicates their business type. The W-9 form has checkboxes where they identify their entity type (individual, LLC, S-corp, C-corp, etc). If they check the S-corporation box AND you have this W-9 on file, then you don't need to send them a 1099. But without proper documentation, you could be liable for not filing required 1099s.

One other thing to consider - some states have different 1099 filing requirements than the federal IRS rules! California, for example, doesn't automatically exempt all corporations from 1099 reporting. I learned this the hard way and got a notice from the state tax board. Definitely check your state requirements if applicable.