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 is a vital distinction for all business tax operations. When hiring an independent contractor, you must become familiar with two tax forms in particular: Form W-9 and Form 1099-NEC.
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 form.
IRS Form 1099-NEC, aka “a 1099,” reports the income a business pays to taxpayers who are not full-time employees. Any employer that pays an independent contractor, freelancer, self-employed person or sole proprietor for services they provided must file Form 1099-NEC with the IRS for each of these payees and send a copy to the payee as well. An independent contractor who receives Form 1099-NEC from an employer must report that income on their tax return.
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 before they start working. Because the information on Form W-9 rarely varies by employer, the completed form is quick and easy for independent contractors to share.
Technically, an employer does not need a W-9 from an independent contractor to issue them a 1099-NEC. 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.
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-NEC from all of their clients. In addition to employers giving copies of Form 1099-NEC to their freelancers and independent contractors, they need to file these forms with the IRS and their state tax authority.
There is an exception to this requirement, however: An employer does not need to complete and file Form 1099-NEC for an independent contractor who is paid less than $600 in any of these categories within a given tax year:
Most employers pay independent contractors solely nonemployee income for services provided, though all of the other categories listed qualify as 1099 income if paid out.
W-9s and 1099s are tax forms that are required when employers work with an independent contractor. Form W-9 is completed by the independent contractor and provides details on who they are. Form 1099-NEC is completed by the employer and details the wages paid to the contractor.
At its most fundamental, the definition of an independent contractor is anyone 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 prespecified 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 an employer uses 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), an employer is not required to deduct payroll tax or account for tax withholding when paying a 1099 contractor. Similarly, when you hire independent contractors, employers 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 for income tax, whether quarterly or annual (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. (Our picks for the best employee retirement plans include options for self-employed people.)
An independent contractor is someone who completes work for your company but isn’t held to the same requirements as 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 meets any of the below criteria, they should likely be classified as an independent contractor:
If an individual receives income that doesn’t come from a salary or wages, they must submit a 1099-NEC with their tax returns. The IRS has strict penalties for not filing a 1099-NEC, including penalties for filing late or filing incorrectly. Employers face penalties if they don’t provide recipients with copies of their 1099-NEC.
Additionally, the due date for filing a 1099 depends on the type of 1099. The 1099-NEC is due by Jan. 31, and the 1099-S and 1099-B are due by Feb. 15. The penalties and fees vary. If an employer doesn’t provide a correct 1099, the penalty is $570; that fine is per contractor, not a flat fee. For example, if an employer has five contractors and doesn’t give them 1099-NECs, the employer could pay fees of up to $2,850.
The penalties for filing a 1099 increase as more time passes after the deadline. 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 Aug. 1. All 1099s filed after Aug. 1 are subject to a penalty of $290.
If you hire contractors or freelancers, you are responsible for collecting a W-9 from them so you can provide a 1099-NEC 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, they are subject to a $50 penalty per attempt.
If your business does not get a TIN from a contractor, you could face penalties from the IRS. You must not only collect the TIN but also demonstrate that you are keeping the data private.
You must collect a TIN if you pay a contractor or freelancer more than $600 annually. If the contractor hasn’t provided a TIN but has given a SSN, you can use that number to process a 1099. If you cannot obtain a TIN or SSN, 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 three attempts, the IRS requires you to withhold 24 percent from all payments to the contractor or freelancer.
Form W-9 and Form 1099-NEC streamline the business owner’s workload come tax season. Both forms are straightforward to fill out, and they present crucial tax information in an organized, easily understandable way.
Independent contractors can follow these steps to fill out Form W-9:
If you need more help, refer to the “General instructions” section below Part II of your W-9.
Business owners can follow these steps to fill out Form 1099-NEC:
When you fill out these forms, go line by line to ensure you are following the proper steps.
Form 1099-NEC is filled out after a tax year ends. The deadline to file 1099-NEC forms with payments to nonemployees 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-NEC forms that indicate payments to nonemployees for the 2023 tax year by Jan. 31, 2024. For other types of reported payments, such as 1099-S or 1099-B forms, the 1099 filing deadline is Feb. 15.
Form W-9 is not subject to IRS deadlines, since the IRS does not collect this form. However, because employers must file Form 1099-NEC 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 client 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 and freelance tax deductions as well.
Many of the best accounting software platforms and tax services make it easy to complete and file 1099 and W-9 forms. These platforms also may streamline the corresponding payments, and their compliance tools will keep you heeding regulations year-round. The result is invaluable time back for other business needs and a near guarantee that your tax paperwork will be correct every step of the way.