Often, an employee who works outside standard workplace hours to fulfill their role for you is an independent contractor instead of a full-time employee. This employee status difference isn’t just in name – it’s a vital distinction for all business tax operations. When hiring an independent contractor, you must concern yourself with two tax forms in particular: Form W-9 and Form 1099. Show
What are W-9 and 1099 tax forms?The distinction between W-9 and 1099 tax forms lies in who provides them and what kinds of financial and tax information each form contains. Here are the basics of each. What is Form 1099?IRS Form 1099 reports the income a business pays to taxpayers who are not full-time employees. Any employer who pays an independent contractor, freelancer, self-employed person or sole proprietor for services they provided must file Form 1099 with the IRS for each of these payees and send a copy to the payee as well. An independent contractor who receives Form 1099 (often known as a 1099-MISC or a miscellaneous income form) from an employer must report that income on their tax return. What is a W-9?IRS Form W-9 tells an employer the legal name, address, and taxpayer identification number (TIN) or Social Security number (SSN) of an independent contractor, freelancer, self-employed person or sole proprietor. An employer should ask for an independent contractor’s W-9 at the outset of the contractor’s work for them. Alternatively, a freelancer should voluntarily provide a completed W-9 to each client with whom they start working – and since the information in Form W-9 rarely varies by employer, the completed form is quick and easy for independent contractors to share. Do you need a W-9 for a 1099?Technically, an employer does not need a W-9 from an independent contractor to issue them a 1099-MISC form. In theory, any method through which an employer obtains an independent contractor’s taxpayer identification number or Social Security number is valid, as an employer only needs either of those numbers to issue a 1099 form. Employers are nevertheless advised to use a W-9 to obtain a contractor’s TIN or SSN, because filing false information on a W-9 is illegal. Using the proper forms can protect employers from facing penalties for false information filed with the IRS. Independent contractors, not employers, are liable for incorrect information provided on Form W-9. Who should get these forms?An independent contractor should file Form W-9 with an employer. However, Form W-9 does not need to be filed with the IRS. Independent contractor tax preparation requires freelancers to get copies of their Form 1099 from all their clients. In addition to employers giving copies of Form 1099 to their freelancers and independent contractors, they need to file them with the IRS and their state tax authority. There is an exception to this requirement. An employer does not need to complete and file Form 1099 for an independent contractor who is paid less than $600 in any of these categories:
Most employers will pay independent contractors solely non-employee income for services provided, though all the other categories listed qualify as 1099 income if paid out. Key takeaway: W-9s and 1099s are tax forms that are required when you work with an independent contractor. Form W-9 is completed by the independent contractor and provides details on who they are. Form 1099 is completed by the employer and details the wages being paid to the contractor. What constitutes an independent contractor?At its most fundamental, the definition of an independent contractor is any person who performs services for your company without being bound to the same requirements as your full-time employees. For example, if you run a media outlet and hire a journalist who is not on your full-time staff to write stories for your publication, that journalist would be an independent contractor. Chances are that you are paying this journalist a pre-specified rate for each story they write. The journalist will invoice you when they file the story, and you will fulfill the invoice without deducting any money from the payment. This payment practice is crucial to the difference between an independent contractor and a full-time employee: Whereas you will use an employee’s W-2 to determine how much money to deduct from their paychecks as tax withholding and payroll tax (often including income tax), you are not required to deduct payroll tax or account for tax withholding when paying a 1099 contractor. Similarly, when you hire independent contractors, you are not required to follow state and federal regulations for employee benefits. The distinction between a W-2 employee and a 1099 contractor means that an independent contractor must put aside a portion of their clients’ payments to pay as income tax, whether quarterly or annual taxes (or both). This difference in employee status also means that an independent contractor is responsible for their own health insurance, retirement account, and other plans that might normally be covered under full-time employee benefits. Key takeaway: An independent contractor is someone who completes work for your company but isn’t held to the same requirements as a full-time employee. How else can an independent contractor be distinguished from a full-time employee?As a business owner, you should determine whether a person providing services to your company should be offered full-time employment or kept as an independent contractor (contractors who consistently work for a certain employer over an extended period are sometimes known as “permalancers“). If the person in question meets any of these criteria, they should likely be classified as an independent contractor:
Key takeaway: Employers don’t have the same control over an independent contractor as they do over a full-time employee. Essentially, the employer can only control what work the contractor produces, not how they produce it. What are the penalties for not submitting a 1099 and W-9?If an individual receives an income that doesn’t come from a salary or wages, they must submit a 1099 with their tax returns. The IRS has very strict penalties for not filing a 1099, including penalties for filing late or filing incorrectly. Employers face penalties if they don’t provide recipients with copies of their 1099. According to accounting firm eFile, the due date for filing a 1099 statement depends on the type of 1099. The 1099-MISC is due by January 31. The 1099-S or 1099-B forms are due by February 15. The penalties and fees vary. If an employer doesn’t provide a correct 1099, the penalty is $560; that fine is per contractor – it isn’t a flat fee. As an example, if you have five contractors and don’t give them a 1099, you could pay fees up to $2,800. The penalties for filing a 1099 increase the more time that passes when the 1099 is due. The penalty starts at $50 if filed within 30 days past the due date. It increases to $110 if you file after 30 days, but before August 1. All 1099s filed after August 1 are subject to a penalty of $280. This is the same penalty levied if you do not to file a 1099 at all. If you hire contractors or freelancers, you are responsible for collecting a W-9 from them so you can provide a 1099 for annual taxes. To avoid any penalties from the IRS, you must demonstrate that at least three attempts were made to obtain W-9 information. If the payee doesn’t provide W-9 information, he or she is subject to a $50 per attempt penalty fee. Fines start at $50 for a business that doesn’t collect a W-9. What happens if you can’t get a TIN from a contractor for a 1099?If your business does not get a tax identification number (TIN) from a contractor, you could face penalties from the IRS. Not only must you collect the TIN, but you must also demonstrate that you are keeping the data private. A TIN is required to be collected by a company if it pays a contractor or freelancer more than $600 annually. If the contractor hasn’t provided a TIN but has given a Social Security number, you can use the Social Security number to process a 1099. If, though, you are not able to obtain a TIN or a Social Security number, you should document your attempts in writing. The IRS requires that you show you made a minimum of three solicitations for the TIN. The contractor or freelancer is subject to a $50 per-attempt fee if they fail to comply. If you’re unable to get the TIN after the three attempts, the IRS requires you withhold 24% from all payments to the contractor or freelancer. How to fill out a W-9 and a 1099Form W-9 and Form 1099 both streamline the business owner’s workload come tax season. Both these forms are straightforward to fill out, and they present crucial tax information in an organized, easily understandable way. How to fill out Form W-9Independent contractors can follow these steps to fill out Form W-9:
If needed, refer to the “general instructions” section below Part II of your W-9 for more help. How to fill out Form 1099Business owners can follow these steps to fill out Form 1099:
Key takeaway: When filling out both forms, go line by line to ensure you are following the proper steps. What are the tax deadlines for Form 1099?Form 1099 is filled out after a tax year ends. The deadline to file 1099 forms with payments to non-employees to the IRS and your state tax authority is Jan. 31 the year after the tax year. Put more simply, you must file all 1099 forms that indicate payments to non-employees for the 2020 tax year by Jan. 31, 2021. For other types of reported payments, the 1099 filing deadline is Feb. 28. Key takeaway: You must file Form 1099 with the IRS and your state tax authorities by Jan. 31 of the following tax year. What are the tax deadlines for Form W-9?Form W-9 is not subject to IRS deadlines, since the IRS does not collect this form. However, since employers must file Form 1099 by Jan. 31, independent contractors who do not provide a W-9 upon starting work with a new client should file the form with their clients as soon as possible. Business owners can also request Form W-9 from contractors as needed between the end of the year and the 1099 filing deadline. Even though there are no deadlines for Form W-9 submissions, independent contractors should be aware of the quarterly tax deadlines that come with freelancing. While learning about Form W-9, you may want a refresher on self-employed accounting basics as well. Key takeaway: There is no deadline to complete a W-9. However, you should obtain it prior to filing the Form 1099. |