When working with independent contractors, employers need to be familiar with two tax-related forms: Form W-9 and Form 1099.
- W-9s and 1099s are tax forms that businesses need when working with independent contractors.
- Form W-9 is what an independent contractor fills out and provides to the employer.
- Form 1099 has details on the wages an employer pays to an independent contractor. This form is filed with the IRS and state tax authorities.
- This article is for employers who work with independent contractors and need to know about the appropriate tax-related forms to complete.
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.
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:
- Awards and prizes
- Payments for healthcare or to an attorney
- Crop insurance proceeds
- Cash payments for aquatic life purchases and all forms of payment for other fishing boat proceeds
- Cash paid by a notional principal contract to an individual taxpayer, a partnership or an estate
- Any other miscellaneous income payments, including non-employee income for services provided
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:
They set their own hours. Unlike full-time employees, who are often bound to certain work hours and office presence requirements, an independent contractor can work whenever they like and come and go from your office as they please.
They use their own tools. To best understand this point, consider the freelance journalist example again. Whereas staff writers likely draft articles in the publication's content management system, freelancers often do not have access to the CMS and will use a separate word processor to write and file their drafts.
They can refuse work. Whereas a full-time employee must perform the tasks you demand of them, independent contractors are their own bosses. If their schedules are too full, their income is large enough that they don't want more work, or they are simply uninterested in the work offered to them, they can refuse the assignment.
- They complete work in their own way. Employers do not control independent contractors in how they work, only the work they produce. According to the IRS, "The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done."
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 1099
Form 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-9
Independent contractors can follow these steps to fill out Form W-9:
- In box 1, write the same name you use on your tax returns, which is likely your legal name. Unless your middle name appears on your tax returns, exclude your middle name.
- In box 2, write your business name or disregarded entity name if you have one in addition to your legal name. In other words, if you are a sole proprietor who conducts business under a different name, write that name in box 2.
- In box 3, check the box corresponding to your business type: individual/sole proprietor or single-member LLC, C corporation, S corporation, partnership, trust/estate, limited liability company, or other. As an independent contractor, you are an individual/sole proprietor or single-member LLC unless you have filled out the extensive paperwork to register your business name as a C corporation or S corporation.
- In box 4, you will detail your exemptions. In almost all cases, you can leave this box blank. The rare exceptions to this rule include corporations that are exempt from backup withholding and payees who are exempt from reporting according to the Foreign Account Tax Compliance Act – two circumstances virtually unheard of among freelancers.
- In boxes 5 and 6, write your address as directed. Use the same address as on your tax return.
- To the right of boxes 5 and 6, there is a space to list the name and address of the person or business that requested a W-9 from you. This space is optional to fill out but can be helpful for remembering all the clients to whom you have given a W-9.
- Box 7, which says "List account number(s) here (optional)," can generally be left blank, unless the person requesting your W-9 directly asks you to enter bank account information on your form.
- After filling out these boxes, you will move on to Part I. Here, if you are a freelancer or sole proprietorship, you will provide your Social Security number. If you are a business, you will provide your employer identification number. If your business is so new that it does not yet have an EIN but you have applied for one, you should write "applied for."
- Now, move on to Part II. Read the four provided statements and certify that they are true. Statement two concerns backup withholding, which you are exempt from unless the IRS has contacted you to tell you otherwise. You can also ignore statement four unless you have filled out box 4. If you can confirm that all four statements are true, sign and date the form where indicated.
- File the completed form with the entity that requested it.
If needed, refer to the "general instructions" section below Part II of your W-9 for more help.
How to fill out Form 1099
Business owners can follow these steps to fill out Form 1099:
- Note that you must fill out five copies of Form 1099: one for the IRS, one for your state tax department, two for the 1099 recipient (the independent contractor) and one for your own records.
- In the large box at the top left, write your business's name, address and telephone number.
- In the two boxes below the address box, write your TIN and your recipient's TIN where indicated.
- Below the TIN boxes, enter your recipient's name and address.
- When documenting non-employee income paid to an independent contractor, the "account number" and "FATCA filing requirement" boxes below the recipient's address can almost always be left blank. The fifth page of Form 1099 details the limited exceptions.
- In box 1, enter all money paid as rent, except if paid to a corporation.
- In box 2, enter all money paid as royalties on intellectual property or oil, mineral, or gas properties. If you paid at least $10 in royalties to the recipient, you must record it.
- In box 3, enter all money paid directly to independent contractors for their services. In previous tax years, a separate box existed for these payments; however, starting in 2020, direct payments to independent contractors are entered in box 3. This box also includes money paid as prizes, research study incentives, punitive damages or anything else not specified by the other boxes.
- Leave box 4 blank, since you do not withhold taxes when you pay independent contractors.
- If you have paid fishing boat proceeds, enter those in box 5.
- If you have paid for any medical or healthcare needs, enter those in box 6. This box includes payments that medical and healthcare insurers make via insurance plans but excludes pharmacy payments for prescription drugs.
- Check box 7 only if the provided statement is true.
- Boxes 8-14 do not apply to most businesses. The IRS provides a document detailing the rare instances when they apply and how to fill them out if needed.
- Boxes 15-17 only apply to businesses that partake in the Combined Federal/State Filing Program. These businesses are not required to complete these boxes, but doing so according to IRS instructions may be helpful.
- Before finalizing your 1099, make sure that you are using the form for the most recent tax year. The IRS changes Form 1099 every year, so using an outdated form can give you trouble come tax season.
- Once you've finalized the form, file the appropriate copies with the IRS, your state tax authority and your recipient. Securely store the copy designated for your business.
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.