When tax season rolls around for businesses that hire contractors, figuring out which tax forms to use and how to file them can be a real struggle — but it doesn’t have to be. In this guide, we’ll cut through the chaos and explain two IRS forms that you’ll need if your business pays contractors or third-party vendors: Form W-9 and Form 1099. In a nutshell, the W-9 collects info from U.S. non-employees to whom your business pays over $600 per tax year so that you can later properly file the 1099, which summarizes how much the company has paid that contractor for the year.
W-9 vs. 1099 Forms: What’s the Difference?
To get a better understanding of the differences between a Form W-9 and Form 1099, let’s quickly look at the who, what, when, and how of each.
|Form W-9||Form 1099-NEC|
|What's it for?||Providing information about an independent contractor that's required in order to pay them, like their contact details, taxpayer number, etc.||Reporting how much an employer paid a contractor in a given tax year.|
|Who fills it out?||Contractor that earns more than $600 per year from an employer.||Any employer who pays a contractor more than $600 per year.|
|Who should file it, and where?||Employer asks the contractor to fill out a blank copy, who then returns it filled out to the employer.||Employer sends one copy to the IRS and state tax authorities, if necessary, and another copy to the contractor for filing their taxes.|
|When should you file?||No deadline, but best practice to request ASAP; you need to obtain it before filing a Form 1099.||By Jan. 31 of the following tax year.|
|How often do you need to file?||Once, before beginning work. Only necessary again if the contractor's information changes.||Annually, in any year that an employer pays a contractor more than $600.|
|What are the filing penalties?||Range from $50 to $550 per form with incorrect information, late filing, or failure to submit. May owe IRS 24% withholding of total amount paid to a contractor without a W-9.|
What is Form W-9?
Form W-9 is an information return that collects essential details, such as contact info and a Taxpayer Identification Number (TIN), from any U.S. non-employee that completes work for a business. It also asks for the payee’s federal tax classification, whether as an individual or sole proprietor, limited liability corporation (LLC) or otherwise, and asks for their signature.
When You Should Use Form W-9 — and How
Any business that plans to hire and pay independent contractors or third-party vendors more than $600 per year should request those workers to fill out a Form W-9 as soon as possible. Without a completed W-9 on hand for each contractor, you won’t have the information you need to file their Form 1099 when doing your taxes at the end of the year.
Another reason why the W-9 is so important: If you can’t provide a contractor or vendor’s TIN on a Form 1099, the IRS could also find you responsible for paying back 24% of a contractor’s pay. This amount would have otherwise been withheld from their paycheck if they were an employee. So, for example, if you owed a vendor $1 million but forgot to get their TIN before paying them, you’d suddenly owe the IRS $240,000. Yikes!
Form W-9 is a fairly straightforward form, but if your workers need help filling it out, refer them to the instructions provided on the IRS website.
Implement These Best Practices for Requesting Form W-9
- Always request a W-9 from every U.S. contractor and third-party vendor you work with.
- Request W-9 forms from contractors and vendors before you begin your working relationship. One way to do so is to require new vendors and contractors to fill out and return the W-9 as part of their onboarding, before receiving their first payment. You can also automate W-9 requests through an HR platform like Pilot.
- After receiving a W-9, you can run a TIN verification on the IRS website to check that the provided info is correct.
- Tell contractors to fill out and submit a new W-9 if any of their information changes, e.g., moving to a new address, beginning to operate as an LLC instead of a sole proprietorship, etc.
- Three years is the statute of limitations for an IRS audit. Keep each W-9 on file for three years after the last tax year you file a Form 1099 for that vendor or contractor.
What is Form 1099?
Form 1099 reports non-employment income of various types to the IRS. More specifically, the 1099-NEC reports non-employee compensation of amounts totaling more than $600 per tax year, most commonly used to report income for freelancers and independent contractors.
Form 1099-NEC lets non-employees know how much you paid them for the entire year while looping in the proper tax authorities. Because there’s no tax withholding for 1099 income, Form 1099 is important because it helps non-employees pay their taxes accurately and on time while informing tax authorities of how much they need to collect from those payees.
Non-employee compensation, referring to payments made to any individual or business that you don't directly employ, includes the following:
- Consulting fees
- Commissions, royalties, and bonuses
- Prizes given for services performed for your business
- Other forms of compensation for services performed for your business
As of 2020, the 1099-NEC replaced the 1099-MISC as the main 1099 form to use for reporting non-employee compensation. Now, the 1099-MISC is used specifically to report other types of miscellaneous income, such as rent, royalties, prizes, etc. Questions on 1099-NEC and 1099-MISC? The IRS provides some clarification on what types of payments to report on which forms, and how to do so.
Though Form 1099-NEC is suitable for most cases involving freelance and contract work, many other types of 1099 forms report income from different non-employment situations, like the 1099-INT (Interest), 1099-G (Government Payments), and 1099-R (Retirement Income).
When You Should Use Form 1099-NEC — and How
Do you need to file Form 1099-NEC? If you did the following four things, then yes:
- You paid someone who’s not your employee.
- You paid for services related to your business.
- You paid an individual, partnership, estate, or, in some cases, a corporation.
- Your payments to that individual or entity totaled at least $600 for the year.
Here’s what to know about filing Form 1099-NEC as an employer:
- Order: Order the number of 1099s that you need from the IRS. The IRS will mail you the requested forms and their instructions, which you can then scan, fill out, and file.
- Form 1096: If you’re filing by mail, you need to include a Form 1096 with every Form 1099. It tells the IRS what forms are included, who is filing them, and the total amount reported. You’ll also have to order this form with your 1099s from the IRS.
- Copies: Form 1099-NEC has five copies, each with a different purpose and destination.
- Copy A: File with the IRS.
- Copy 1: File with your state tax agency.
- Copy B: Send to the payee for filing their taxes with the IRS.
- Copy 2: Send to the payee for filing their state taxes.
- Copy C: Keep for your records for at least three years after the last payment to this recipient.
- Deadline: You need to file these forms after Dec. 31 of a completed tax year and by Jan. 31 of the following year. Unlike other tax forms, there is no automatic 30-day extension to file the 1099-NEC, so you have to be on top of filing.
- Method: Choose whether to email or mail your forms to contractors and vendors and whether to e-file or mail your filings to the IRS and your state tax agency. E-filing is required when the number of forms of one type is 250 or more per year. An HR or payroll platform can also help you e-file these forms.
File Your 1099s on Time and Accurately to Avoid Hefty Penalties
All 1099s are due by Jan. 31 of the following tax year, with penalties imposed by the IRS per form filed late, incorrectly, or — worst case — not filed at all. As far as the IRS is concerned, a late filing and incorrect filing incur the same penalty, so you want to make sure to file 1099s early or on time and as accurately as possible.
For 1099s filed less than one month late, you’ll pay $50 per form. That increases to $110 per late form if you file more than 30 days late but before Aug. 1. After Aug. 1, that fine grows to $270 per form. Intentional disregard, or intentionally incorrectly filing a 1099 or failing to file a 1099 when the IRS knows you should have filed one: that’ll cost you $550 per form, with an unlimited cap on how much the IRS can charge you. Exact fee amounts and total maximum fees depend on business size, going up almost every year.
Avoid any late or inaccurate filings by preparing as early as you can. Double-check often that you have the information necessary to fill out your 1099s — thanks to requesting via Form W-9s. Your accounting and payroll teams should be in sync, tracking how much you pay contractors throughout the year so you aren’t blindsided by needing to file their Form 1099s at year-end.
File Your Forms Faster With Pilot
Implementing an HR or payroll platform like Pilot can help you streamline your W-9 and 1099 paperwork. Let us handle your W-8 and W-9 requests and prepare and file your 1099-NEC forms with the IRS; you never have to worry about another 1099 deadline again. Hiring contractors shouldn’t come bundled with tax-season stress — let’s get your taxes done as quickly, accurately, and painlessly as possible. Try Pilot today to find out why we’re the all-in-one solution to your HR and payroll concerns.
⚖️ Legal Disclaimer: The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.