The Internal Revenue Service requires employers to withhold employment taxes from anyone classified as an employee. By hiring individuals and businesses as independent contractors, a business does not have to worry about withholding taxes on payments made to these vendors. If hiring a subcontractor legally organized as a limited liability company, or LLC, do not withhold taxes, but do report payments made to the company in excess of $600 to the IRS. By reporting payments, the IRS ensures the LLC pays appropriate taxes on the income when it files its tax returns.
Request an IRS Form W-9 from the LLC subcontractor. Contractors must provide clients with the correct business name, address and employer identification number so payments made to them can be reported to the IRS. Keep the Form W-9 from the LLC with accounting business records. Do not send the form to the IRS. Use it at the end of the year to prepare the report of contractor payments to the IRS.
Pay the LLC subcontractor in its business name. Use the information provided on the W-9 to prepare the payment to the LLC in any agreed upon format. Pay the LLC vendor by check, electronic transfer or cash. If making payment by cash, record the payment in accounting records and request a receipt from the LLC.
Report the payment to the IRS at year-end. The IRS requires a report of all payments to independent contractors that exceed $600. Prepare a Form 1099-MISC for the LLC subcontractor with the year-end tax preparation. The 1099-MISC is sent to the IRS and to the subcontractor for use with the company's tax preparation. The 1099-MISC works in a similar way as a W-2 does for the employee in reporting income to the IRS.