Do I need to generate 1099's for each individual?

Question:

I founded a subchapter S corp in October of 2003; each of my team members have been working under an independant contractor agreement for equity only -- no pay.

Do I need to generate 1099's for each individual?

Answer:

You get what you pay for... A 1099 is issued when you pay cash or give in kind value to a vendor for services rendered. If no cash was paid, and no in kind products of value were given to the employee/vendor/shareholder, then a 1099 is not required. If for example, you bought and gave to the employee/vendor/shareholder a PC or laptop, then you would need to give them a 1099 for equivalent depreciated or purchase value for the computer.

If you give them stock and they become a shareholder/owner of the company, then depending on how the company is organized (legally structured), they might get a K1 or other type of form representing their equity. If the company is an S Corp or partnership for example, then they would get a K1 on completion of the company's fiscal year. The K1 would represent that the employee's shares have either lost or increased in value, either of which would constitute a taxable event to be reconciled on their personal taxes for that year.

The fact that you gave them stock for their work does not mean that they have been given money because a market is not established for the stock. If you or somebody else decides to buy the stock back, then you (or other buyers) and the employee/shareholder then need to negotiate a purchase price acceptable to both of you. That then is also a taxable event, reconcilable on their personal taxes.

James Duran

Duran Human Capital Partners, Inc.

Campbell, CA 95008

D 408 540-0071

C 408 893-4905

jamesd@duranhcp.com

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