10.2 Federal Income Tax, Self-Employment Tax, Form 1099-NEC, and Entity Returns

Beyond employee payroll taxes, a Tennessee contractor must comply with federal income tax filing schedules, owner self-employment and estimated tax rules, and information-return reporting for subcontractors. Because the Tennessee Business and Law examination frequently tests which IRS tax form, filing deadline, and tax rate applies to each business entity—as well as when a prime contractor must issue Form 1099-NEC or withhold 24% backup withholding from a subcontractor—these rules must be memorized with precision.

Federal Income Tax Forms and Deadlines by Business Entity

How a construction company's profits are taxed at the federal level depends on its legal structure and tax elections:

1. Sole Proprietorship (and Single-Member Disregarded LLC):
   • Tax Forms: Reports construction gross receipts, cost of goods sold, and deductible business expenses on Schedule C (Profit or Loss From Business), attached to the owner's personal IRS Form 1040. Because the owner is not a W-2 employee of the sole proprietorship, the owner cannot take a payroll salary deduction on Schedule C; instead, if net earnings from self-employment are $400 or more, the owner must also file Schedule SE (Self-Employment Tax).
   • 15.3% Self-Employment Tax Math: Under the Self-Employment Contributions Act (SECA), a sole proprietor pays 15.3% (12.4% Social Security up to the annual OASDI cap + 2.9% Medicare with no cap) calculated on 92.35% ($100\% - 7.65\%$) of Schedule C net profit, and may deduct 50% of the Self-Employment Tax as an above-the-line adjustment on Form 1040 when computing adjusted gross income (AGI).
   • Filing Deadline: 15th day of the 4th month after the close of the tax year (April 15 for calendar-year taxpayers).
2. General Partnership, Limited Partnership, and Multi-Member LLC (Default Classification):
   • Tax Forms: Files an annual information return on IRS Form 1065 (U.S. Return of Partnership Income) and furnishes a Schedule K-1 to each partner or LLC member showing their distributive share of ordinary business income, deductions, and credits. The partnership itself pays no federal income tax; each partner reports their Schedule K-1 share on their individual Form 1040 (even if the cash profit is kept inside the company for working capital), and general partners / active LLC members pay 15.3% Self-Employment Tax on their distributive share via Schedule SE.
   • Filing Deadline: 15th day of the 3rd month after the close of the tax year (March 15 for calendar-year partnerships and multi-member LLCs)—one full month earlier than individual returns so partners receive their Schedules K-1 in time to file Form 1040 by April 15.
3. S-Corporation:
   • Election and Tax Forms: A domestic corporation or eligible LLC elects S-Corporation status by filing IRS Form 2553 (Election by a Small Business Corporation) no later than 2 months and 15 days after the beginning of the tax year the election is to take effect (by March 15 for a calendar-year company), or at any time during the preceding tax year. An S-Corporation files an annual information return on IRS Form 1120-S and issues Schedule K-1 to each shareholder.
   • Reasonable W-2 Salary Requirement: Unlike a sole proprietor or partner, an S-Corporation shareholder who actively works in the construction business (such as a president, estimator, or Qualifying Agent) must be paid a reasonable W-2 salary subject to normal FICA withholding and employer matching (15.3% combined) before taking remaining S-Corporation profits as shareholder distributions (which pass through on Schedule K-1 free of FICA and Self-Employment tax).
   • Filing Deadline: 15th day of the 3rd month after fiscal year-end (March 15 for calendar-year S-Corporations).
4. C-Corporation:
   • Tax Forms and 21% Flat Corporate Tax Rate: Files IRS Form 1120 (U.S. Corporation Income Tax Return) and pays entity-level federal income tax at a flat 21% federal corporate tax rate (IRC § 11).
   • Double Taxation: C-Corporation profits are taxed first at 21% at the corporate level on Form 1120; when after-tax profits are distributed to shareholders as cash dividends (reported on Form 1099-DIV), those dividends are not deductible by the corporation and are taxed a second time on the shareholders' personal Form 1040 returns.
   • Filing Deadline: 15th day of the 4th month after fiscal year-end (April 15 for calendar-year C-Corporations).

---

Quarterly Estimated Income Tax Payments (Form 1040-ES vs. Corporate Estimates)

Because federal income taxes operate on a "pay-as-you-go" system, business owners and C-Corporations cannot wait until April 15 to pay their entire annual tax bill:

• Individuals, Sole Proprietors, Partners, and S-Corp Shareholders (IRS Form 1040-ES): Must make four quarterly estimated tax payments if they expect to owe $1,000 or more in federal income and self-employment tax for the year after subtracting withholding and credits. For calendar-year individuals, the four installment due dates are:
  • Installment 1: April 15
  • Installment 2: June 15
  • Installment 3: September 15
  • Installment 4: January 15 of the following calendar year
• C-Corporation Estimated Tax (the current IRS corporate estimated-tax worksheet Worksheet / EFTPS): A C-Corporation must make quarterly estimated tax deposits via EFTPS if it expects its annual federal corporate income tax liability to be $500 or more. For a calendar-year C-Corporation, payments are due on the 15th day of the 4th, 6th, 9th, and 12th months of its tax year: April 15, June 15, September 15, and December 15.

---

Information Returns: Form W-2, Form W-9, Form 1099-NEC, and 24% Backup Withholding

At the close of each calendar year, a contractor must issue annual wage statements to employees and nonemployee compensation returns to covered subcontractors:

• Form W-2 and Transmittal Form W-3 (Employees): Every employer must furnish Form W-2 (Wage and Tax Statement) to each employee and file Copy A of all Forms W-2—together with summary transmittal Form W-3—with the Social Security Administration (SSA) on or before January 31 of the following year.
• Form W-9 (Request for Taxpayer Identification Number and Certification): Before making the first payment to any subcontractor, independent tradesperson, or non-employee vendor, a prime contractor must obtain a signed IRS Form W-9 certifying the payee's legal name, business entity classification, and Taxpayer Identification Number (SSN or EIN).
• Form 1099-NEC (Nonemployee Compensation) and Transmittal Form 1096: For payments made in calendar year 2026, whenever a business pays $2,000 or more for services or labor performed in the course of trade or business by a person who is not an employee, the business must furnish Form 1099-NEC to the payee AND file it with the IRS (with transmittal Form 1096 if filing on paper) no later than January 31 of the following year:
  • Who Must Receive Form 1099-NEC at $2,000+: Unincorporated independent contractors and subcontractors—specifically individuals, sole proprietors, general or limited partnerships, and LLCs taxed as sole proprietorships or partnerships—PLUS attorneys and law firms paid $2,000 or more for legal services (even if the law firm is organized as a C-Corporation or S-Corporation!).
  • Who Is Exempt from Form 1099-NEC: (1) Subcontractors taxed as a C-Corporation or S-Corporation (other than attorneys/law firms), as verified on their signed Form W-9; (2) payments made solely for merchandise, building materials, freight, or storage (e.g., buying $50,000 of lumber from a supply house with no installation labor); and (3) payments made by credit card or third-party payment network (which are reported by the payment processor on Form 1099-K).
• Mandatory 24% Backup Withholding (IRC § 3406): If an unincorporated subcontractor or 1099-NEC service provider fails or refuses to furnish a valid TIN before payment is made (or if the IRS notifies the contractor via a CP2100 "B-Notice" that the TIN provided is incorrect), the paying contractor is legally required under IRC § 3406 to deduct and withhold 24% backup withholding from the gross payment made to that subcontractor and report/remit the withheld tax to the IRS on Form 945 (Annual Return of Withheld Federal Income Tax)!

$$\text{Mandatory Backup Withholding (Missing TIN on W-9)} = 24\% \times \text{Gross Subcontractor Payment}$$

Worked Numeric Examples: Self-Employment Tax and 24% Backup Withholding

• Example 1 — Sole Proprietor Self-Employment Tax (Schedule C & Schedule SE): Suppose a sole proprietor framing contractor earns $100,000 in net profit on Form 1040 Schedule C. On Schedule SE, net earnings from self-employment are $\text{\textdollar}100,000 \times 92.35\% = \text{\textdollar}92,350$. Because $92,350 is below the annual Social Security wage cap, the contractor's Self-Employment Tax is $\text{\textdollar}92,350 \times 15.3\% = \text{\textdollar}14,129.55$, and the contractor may deduct half of that amount ($\text{\textdollar}7,064.78$) above the line on Form 1040.
• Example 2 — 24% Subcontractor Backup Withholding (IRC § 3406): Volunteer General Contractors owes a $15,000 progress payment to an unincorporated drywall subcontractor (a sole proprietor) who has started work but refuses to return a signed Form W-9 with an SSN or EIN. Before issuing the check, Volunteer General Contractors must withhold 24% backup withholding: $$\text{Backup Withholding} = \text{\textdollar}15,000 \times 24\% = \text{\textdollar}3,600 \quad \Longrightarrow \quad \text{Net Check to Subcontractor} = \text{\textdollar}15,000 - \text{\textdollar}3,600 = \text{\textdollar}11,400$$ Volunteer General Contractors remits the $3,600 to the IRS on Form 945 and reports both the $15,000 gross nonemployee compensation and the $3,600 federal tax withheld on the subcontractor's Form 1099-NEC by January 31.

The 1099-NEC service-payment threshold was $600 for 2025 and became $2,000 for 2026; later years have statutory inflation adjustment. Backup withholding can require reporting regardless of the ordinary dollar threshold. Gross proceeds paid to an attorney on Form 1099-MISC are a separate reporting category and should not be confused with legal-service compensation on NEC. Obtain the payee’s correct TIN and classification using W-9; a missing signature alone is not always a backup-withholding trigger for ordinary service payments. Follow IRS certification and B-notice procedures. Estimated-tax duties also depend on withholding and safe-harbor rules, not just the expected balance due. The self-employment example assumes no other wages using the Social Security base and no Additional Medicare Tax liability.

Source check (October 13, 2026): IRS general information-return instructions.

2026 reporting calendar: The usual January 31 deadline for 2026 Forms W-2 and 1099-NEC falls on Sunday, January 31, 2027, so the deadline moves to Monday, February 1, 2027. January 31 is the nominal annual date; apply the IRS weekend and legal-holiday adjustment for the actual reporting year.