W-9 vs 1099
When taxes are in question, even the slightest mistake can cause problems and slow your business down. So, whether you’re an independent contractor or a business hire one, make sure you double-check the information on both the Form W-9 and Form 1099. Additionally, keep in touch with the other party responsible for filling out the forms, and don’t be afraid to ask for clarification. In the end, remember that both tax forms have explanations of what you should put in them, so make sure you read the instructions carefully and request professional help if you need any. Even though this article provides you with information about the forms and tips on how to properly fill and submit them, it is not a replacement for professional advice.
Both W-9 and 1099s are types of information returns the IRS requires to collect information about the contractor working for a business for tax reporting purposes. However, there is a big difference between Form W-9 and Form 1099 - W-9 is filled by the independent contractor to provide information to the business they're providing the service for. After that, the business hiring and paying independent contractors (more than $600 within a tax year) will use this information when reporting on a Form 1099-NEC (formerly reported in Box 7 of the 1099-MISC, Miscellaneous Income).
Whether you are working with an independent contractor, or are a contract worker yourself, it is important to know which tax forms you need and how to properly file or collect them. Unlike full-time employees, a self-employed person or a freelancer doesn't have tax withholding applied to their paychecks. They need to fill out special tax documents and forms in order to report their income and calculate their own taxes.
What is IRS Form W-9?
Form W-9, Request for Taxpayer Identification Number and Certification, is an IRS form that is sent by the client (or a financial institution) to the independent contractor based in the United States with whom they plan to work with, in order to get their return information. The contractor fills out this tax form with their business information, such as the business name, address, and tax identification number. The purpose of the Form W-9 is to identify the contractor and help business owners hiring them to handle taxes more easily. This tax form is filled out only once, at the beginning of the cooperation between the contractor and their client. It changes only if the contractor’s business information changes, at which point the contractor should inform their client and request to fill out the Form W-9 again. Keep in mind that you don't need Form W-4, as it only applies to the employees.
Important: If a business is working with a foreign independent contractor (living outside of the US), they need to issue a Form W-8BEN or W-8BEN-E instead.
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What is Form 1099?
There are several Form 1099 variations, but, in this case, you need to pay attention to Form 1099-NEC, Nonemployee Compensation. Until 2020, this information was reported in Box 7 of Form 1099-MISC. IRS reintroduced Form 1099-NEC for reporting for the 2020 tax year.
Form 1099-NEC is a tax form sent by the client to the contractor and it denotes how much money they’ve paid the contractor over a single tax year. This form is submitted once at the end of the year, in the event that the contractor’s services cost more than $600 in a single tax year. The client should send one additional copy to the IRS as well, in order to help them track income tax for freelancers. As a contractor, you’ll want to keep the Forms 1099-NEC you receive from your clients as they will help you when paying your own taxes. The percentage of the sum of all of the 1099 forms you receive from your clients should go towards your self-employment tax and Medicare taxes. As a client, you should only fill out this form your contractor billed you over $600 in a single tax year. Filling and submitting the Form 1099-NEC form will cost you nothing, but it will help the internal revenue services check up on the contractor’s taxes and help the contractor double-check their own calculations.
If you are an independent contractor, make sure you save your invoices and 1099-NEC forms, and keep them for at least 2 tax years (preferably keep them until your business is closed) as the IRS will want to peruse them to ensure you’re paying the right amount in taxes.
Other types of 1099 forms:
- 1099-DIV: This form is used to report dividend income and distributions
- 1099-C: This form is collected for the cancellation of debt in amounts of $600 or higher
- 1099-K: This form is collected for merchant cards and third-party network payments
- 1099-INT: This form is collected to report interest income in amounts of $10 or higher
- 1099-S: This form is collected to report proceeds from real estate transactions
Do you need Form W-9 or Form 1099-NEC?
In short - you will need them both if you are working with independent contractors or non-employees. Technically, you shouldn’t even be able to fill out Form 1099-NEC without having received the Form W-9 from your independent contractor first.
Form W-9 vs Form 1099-NEC: Main differences
Here is a list of the main differences between Form W-9 and Form 1099-NEC:
- Filled out by the independent contractor
- Meant for clients to collect tax information from independent contractors (hence the name Request for Taxpayer Identification Number and Certification)
- Provides the clients with independent contractor's contact info and tax number
- Clients send a blank copy to the independent contractor, who returns it when filled out
- Submitted only once, unless the contractor's information changes
- Needs to be completed before the independent contractor starts working for the client
- Filled out by the client
- Meant for clients to report how much they've paid the independent contractor within a tax year
- Client sends two filled out copies: one to the independent contractor and the other to the IRS
- Filed at the end of every tax season
- Provides information about how much an independent contractor was paid by a specific client in a single tax year
- Needs to be sent every year, before January for every independent contractor who has been paid more than $600 within a tax year.
How to fill out Form W-9
Filling out this form as a contractor should not be too demanding. However, if you want to check it out before you attempt to fill it in, you can find an example of the Form W-9 on the IRS website.
1. Write your full legal name on the first line.
2. The second line is meant for the name of your business. This may be your “doing business as” name or the name of your business. If you don’t have one, you can leave the second line blank.
3. Choose the box that most accurately describes your business entity type. In most cases, this will be the "individual or sole proprietor". If you have a limited liability company, don't forget to state the type - C corporation, S corporation, or Partnership.
4. Provide your address.
5. Fill out your Tax Identification Number - this can be either your Social Security Number (SSN) or your Employer Identification Number (EIN).
6. Put in your signature and date.
Apart from getting to know what the form looks like, the example of the IRS website has some useful information about backup withholding, penalties, and exemptions. Even though we can provide you with advice and tips on how to fill in the Form W-9, you should still read the instructions in the form before filling it out.
Things to look out for when filling in tax forms
As an independent contractor, you need to be careful when sharing your personal or business information. This means you should only fill out a Form W-9 you receive from legitimate clients that want to request your services. Do not fill out and submit a Form W-9 you received from unknown sources.
As a payer planning to hire a contractor, keep in mind that Form W-9 is used only for independent contractors that work in the United States. If you’re looking to hire foreign independent contractors, the process will look much different and the right tax form to collect is W-8BEN for individuals and W-8BEN-E for foreign entities.
How to fill in Form 1099
Filling out the tax Form 1099 is the job of any business owner that has hired independent contractors. This form shows the nonemployee compensation the payee received from the client over the fiscal year. Basically, it is used to report an independent contractor’s income. You can find a copy of the Form 1099-NEC on irs.gov. Make sure you use the information your contractor provided in the Form W-9 to fill out the Form 1099. This information should contain:
- The full legal name of the payee (or business name if applicable)
- Business entity type (sole proprietorship, LLC, partnership, C-corporation, S-Corporation, etc.)
- A valid address
- Tax ID number - SSN, ITIN, EIN
An independent contractor receives this form (1099-NEC) instead of the From W-2 form when the payer doesn't consider you an employee, and therefore doesn’t withhold any of the usual payroll taxes. An exception to this is Box 4 on the 1099-NEC form. Namely, if you do not provide a TIN to the payer, they must backup withhold on certain payments. As an independent contractor, you can include this amount in your tax return as taxes withheld.
As the payer, if you do not backup withhold federal tax when required, you (or the business) can be liable for the tax amount you were required to withhold from the payee, regardless of whether they actually withheld it.
Submitting the Form 1099
From 1099 comes in two copies, both of which should be filled out by the payer and submitted to two different entities.
- Submitted to the IRS
- Can be submitted physically or electronically
- Filing a physical copy requires form 1096 as a cover sheet
- Filing an electronic copy can be done through the IRS FIRE System
- Before filing an electronic copy, you will need the TCC (Transmitter Control Code), for which you should apply at least 30 days before 1099 is due
- Sent to the contractor
- Can be done physically or electronically
- Before sending Copy B electronically to the contractor the payer will need their consent
- Consent should be acquired through the same means you plan to send the copy
Consent should also follow the general rules of IRS and should include (among other things): the scope and duration of the consent, instructions on how to withdraw consent, the date on which the form will no longer be available.
Additionally, in some cases, the state will require you to submit an additional copy to them, while in some states the IRS will do that for you only if the forms have been submitted electronically.
Form 1099 deadline and penalties for tax reporting of 2020
Unlike the Form W-9, which has to be submitted before the contractor starts working for the client, Form 1099 needs to be submitted annually, before the end of the tax season. The due date for submitting both copies of 1099-NEC is January 31, 2021. If this date does not fall on a workday, the next workday will be the deadline.
Make sure you send both copies before the due date because there are penalties for being late, and some of them can be extremely detrimental to your small business:
- $50 per From 1099, if you file within 30 days of the due date
- $110 per Form 1099, if you file more than 30 days after the due date but by August 1
- $280 per Form 1099, if you file after August 1; with a maximum penalty of $1,130,500
From 1099-NEC vs 1099-MISC
As we’ve mentioned before, From 1099-NEC is used to report income for hired independent contractors that billed you over $600 for a tax year. For this, make sure to use the 1099-NEC (Nonemployment Compensation) form.
Not all income is equal though, and different types of income are susceptible to different types of taxation. Form 1099-MISC is submitted when reporting payments such as:
- Medical and health care payments
- Prizes or awards
- Crop insurance proceeds
- Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish
- Payments to your attorney, or legal settlements
- Fishing boat proceeds
In addition, you should use Form 1099-MISC to report any direct sales of at least $5,000 of consumer products for resale anywhere other than a full-time permanent retail institution.