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Form W-9, an IRS form, is used by employers to collect information concerning contractors (such as names and addresses) so that their earnings may be reported at the end of the year. Contractors who earned $600 or more are given Form 1099 (1099-NEC) at the end of the year so that they may report and pay taxes on the profits you paid them.
Collecting W-9s and submitting 1099s may be a payroll headache for a small firm, particularly if you’re managing many contractors.
When should you use Form W-9 instead of Form 1099?
When you initially start working with a contractor, it’s best to collect contractor information on a W-9 form. You’ll already have the information you need to complete the year-end 1099 if they earn more than $600 throughout the tax year. For each contractor who made $600 or more throughout the tax year, you’ll issue the 1099-NEC form at year’s end–no later than Jan. 31 the following year.
Please keep in mind that a copy of the 1099 is issued to both the contractor and the IRS.
Whether it comes to when to utilize a W-9 versus 1099 and what form of 1099 to use, the IRS has a lot of restrictions and limitations. The diagram below explains how the information on the W-9 might result in a variety of 1099s, each of which is utilized for a different purpose. However, the emphasis of this essay will be on payments to contractors that result in a 1099-NEC being issued at the end of the year.
Employers are given the W-9 as an input form so that data may be reported on a 1099 at the end of the year.
What Does the W-9 Form Mean?
The IRS document Form W-9, Request for Taxpayer Identification Number and Certification, is used to collect data that your company has to disclose to the IRS at the end of the year. However, since IRS forms change often, the IRS website is the best place to go for IRS tax forms and instructions. You’ll find thorough instructions there to assist your contractors in accurately completing the form.
Keep a copy of the W-9 on file after your contractor completes it in case you’re ever audited. The W-9, when completed and signed, verifies that you acquired the right information for the taxpayer. A copy of this document is not required by the IRS.
What to Put on the W-9 Form
It’s simple to see why you need to gather the correct information once you understand what the W-9 is. While most of the data fields, such as name, address, and tax categorization, are self-explanatory, a popular query is: What is a TIN?
The Social Security Administration (SSA) or the Internal Revenue Service (IRS) provide the TIN (Taxpayer Identification Number). It is employed in the administration of tax laws by the latter.
It’s their Social Security number for independent contractors who don’t have a company organization. The TIN for business owners and contractors is their federal employment ID number.
You must withhold 24 percent for federal taxes if the contractor does not give a TIN, according to IRS requirements. As a result, this should be reported on the 1099-NEC at the end of the year. If you need assistance filling out the W-9, go to the IRS website for information and resources.
What Is Form 1099-NEC?
The 1099-NEC is an IRS form used to record various types of income, including that earned by an independent contractor for work done for a corporate or private employer. It’s comparable to an employee’s year-end W-2 in terms of data fields, but it’s used by companies that pay non-employee contractors like freelancers or contract employees.
Payments paid to a contractor who earns $600 or more in a tax year should typically be reported on a 1099-NEC. A person may obtain a 1099-NEC for a variety of reasons.
Here are some more circumstances when a 1099-NEC is required:
- Report crop insurance proceeds: Farmers get money from insurance providers when their crops are damaged or destroyed.
- For self-employed crew members earning money on a fishing boat or vessel, set a new record.
- Payments such as severance compensation, cash incentives, and stock options granted to departed workers should be disclosed.
Those boxes on the report will be left blank for most contractors. The 1099-NEC, like the W-9, is accessible to see or download on the IRS website, along with instructions on how to use it and an explanation of each field.
The best payroll software allows you to easily input payroll data into an electronic 1099 form, eliminating the need to download or buy paper copies and send them. This saves you money on forms and postage while also providing greater precision than manually calculating earnings.
What to Put on the 1099 Form
You’ll enter your information under “Payer’s Name” and the contractor’s information under “Recipient’s Name” on a 1099-NEC. Then, in Box #3, “Other Income,” you’ll state how much you paid in gross income. Leave the federal and state income tax fields blank if you haven’t already done so.
Nonresident aliens and foreign entities are subject to special rules.
Although 1099 is used to record payments to independent contractors, an IRS Form 1042-S is utilized if the contractor is a non-resident alien or a foreign business organization. This form takes into consideration special tax withholding rates and international treaties. The IRS offers a webinar on Form 1042-S that outlines what it is and when it should be used.
1099s in Other Forms
We’ve listed a handful of the most typical 1099s here since W-9s are used to collect information for all types of future 1099 payments.
- 1099-MISC: This form is used to record unrelated income (rents, prizes, and other income payments)
- 1099-C: For debt cancellations of $600 or more, this form is used.
- 1099-K: Used for merchant cards and payments made via third-party networks.
- 1099-INT: This form is used to record interest income of $10 or more.
- 1099-S: This form is used to record real estate transaction revenues.
When it comes to issuing 1099s, there are a few common mistakes to avoid.
While the IRS standards are quite clear, minor errors may necessitate the re-issuance of a 1099. Make sure your 1099 form contains the contractor’s entire name, for example. Make sure the spelling, TIN number, and payment amount are correct. You don’t want the contractor to pay taxes on $6,000 in earnings when they only made $600.
Other frequent mistakes are:
- Employees should not be given 1099s; instead, they should be given W-2s.
- You don’t have to issue 1099s to companies. 1099s are only required for independent contractors that work for you. There is no requirement for 1099 if you engage a corporation to provide a service, such as cleaning your office once a week.
- Missing the January 31 deadline: All 1099-NEC forms containing non-employee remuneration (in “Box 7” of 1099) must be submitted by January 31 of the year following the year for which you’re reporting. Other sources of income may be stated later.
- The IRS gives five copies of the 1099 online, one for federal and state returns, the contractor, and your records. It also includes an example of the original one you will send to the IRS (which should not be printed and submitted). Penalties may apply if this copy (the red ink copy) is printed and submitted.
- Filing the incorrect 1099 form: There are a lot of 1099 forms to choose from. Independent contractors must file Form 1099-NEC to record their earnings.
Penalties for Failure to Submit a 1099
You will be penalized in addition to having to reprint inaccurate 1099s. In 2021, the IRS upped the penalties related with 1099s, and if you’re not cautious, you might wind up paying up to $270 each return. Separate fines may apply if you fail to file proper 1099 copies with the IRS or fail to distribute them to your contract employees.
If you fail to submit 1099s on time and appropriately, you may face the following penalties:
If your company has average yearly gross revenues of $5 million or less for the three most recent tax years, your potential penalties are lower than those imposed by the IRS on bigger businesses. A maximum cost of $556,500 might be levied if the reports are filed before the August 1 deadline. You might be fined up to $1,113,00 if you don’t file by Aug. 1 or never submit them at all.
You may be liable for damages if you submit a fake information return for payments you claim to have paid to another individual. The individual may sue you for civil damages of up to $5,000 or more.
Why Do Contract Workers Need Tax Forms?
You’re not obligated to withhold or pay taxes like FICA when processing payroll for contractors. However, since the IRS compels them to pay taxes on their own, they must collect, monitor, and report their earnings on the proper payroll form.
Although you are not responsible for ensuring that your contract employees pay their taxes, you must ensure that they get correct earnings information by January 31 of the following year in order to comply; otherwise, you may face penalties.
Conclusion
The W-9 and 1099 are related in that the W-9 collects information that is subsequently reported to the IRS on a 1099-NEC for contractors you pay $600 or more in a tax year. A copy of the W-9 is preserved in your company’s records, while copies of the 1099-NEC are sent to the IRS and your contractor. When the contractor files their taxes, they utilize 1099 to record their earnings.
