Generally, the IRS does not require, nor typically look for, 1099-NEC/MISC forms sent to S-Corps, as they are considered sophisticated entities. However, the IRS does look at 1099s issued to S-Corps for specific exceptions: legal services (even if incorporated), medical/healthcare payments, and some royalty/rent payments.
According to the IRS's general rules, an S corporation does not receive a 1099 Form; the same goes for a C corporation. S corporations are exempt from receiving Form 1099 because they are pass-through entities; their income is reported directly on the owners' tax returns rather than at the corporate level.
Will the IRS catch a missing 1099? The IRS knows about any income that gets reported on a 1099, even if you forgot to include it on your tax return. This is because a business that sends you a Form 1099 also reports the information to the IRS.
Using their matching system, the IRS can detect errors in your returns. They also receive a copy of your 1099 form, so they know exactly how much you owe in taxes. Keep all your records safely.
Even though the IRS audits only a small fraction of tax returns, the IRS matches nearly all Forms 1099 against your Form 1040, sending automated notices to pay up if you forget to report one.
Translation: S Corps are less likely to be audited than individual taxpayers. In fact, S Corps have among the lowest audit rates of any business entity type. The IRS tends to focus its limited resources on high-risk categories: large corporations, high-income individuals, and returns with obvious red flags.
The "2% rule" for S Corporations treats shareholders owning more than 2% of the company's stock (or voting power) differently for fringe benefits, classifying them like partners in a partnership, not regular employees; this means benefits like health insurance premiums paid by the S Corp must be included as taxable wages on their W-2, rather than being tax-free, though the shareholder can often deduct these premiums as an "above-the-line" deduction. This rule prevents them from participating in tax-advantaged Section 125 cafeteria plans, making benefits like Health FSAs unavailable on a pre-tax basis.
Failing to report income from a 1099 can lead to unreported income penalties, interest, or even an audit. The IRS uses an Automated Underreporter (AUR) program that matches what you file on your tax return against what payers report. If the numbers don't coincide, it's unlikely the omission will go unnoticed.
The biggest tax mistakes people make include filing late, math errors, incorrect personal info (like Social Security numbers), forgetting deductions/credits (like EITC), misreporting income, not signing forms, and making errors with bank details for direct deposit, all leading to delays, penalties, or missed savings, with using tax software or professionals helping avoid these common pitfalls.
But for individuals filing with a Schedule C—the necessary form you must use if you have 1099 income—your odds of getting audited are higher. Overall your odds of getting audited arelikely low—just a few percent out of 100—but certain actions or deductions will increase the likelihood of investigation.
Steps to stay compliant:
If you fail to file a correct Form 1099-S by the due date (including any extensions) or you fail to furnish a correct payee statement, you may be subject to penalties. The penalty amount depends on how late the form is filed and can range from $60 to $340 per form, depending on the severity and length of the delay.
S-Corp reasonable salary is the market-rate compensation you must pay yourself before taking distributions, typically ranging from $40,000-$150,000+, depending on your role, industry, and location. The IRS requires this to prevent payroll tax avoidance, with penalties reaching 20% plus interest for non-compliance.
S Corp Failure-to-File Penalty
If the return remains unfiled for 12 months or more, the maximum penalty equals the monthly penalty multiplied by 12. So the maximum failure-to-file penalty for a three-owner S corporation would be $7,020 ($585 times 12).
If the records of your corporation show that the owner is receiving minimal or no salary, you are likely to face an audit. Owners of S corporations generally must be paid reasonable compensation for their services.
Not reporting all of your income is an easy-to-avoid red flag that can lead to an audit. Taking excessive business tax deductions and mixing business and personal expenses can lead to an audit. The IRS mostly audits tax returns of those earning more than $200,000 and corporations with more than $10 million in assets.
Does the IRS Check Every Tax Return? The IRS does not check every tax return. It does not check the majority of them, but the IRS implements methods that track certain factors that would result in a further examination or audit by them.