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Business owners are obligated to provide certain information to the IRS when working with independent contractors or freelancers. The two key information return forms to collect and submit to the IRS are the W9 and the 1099. Understanding the distinction between W9 vs. 1099 forms will help ensure you’re sending all necessary information about your contractors and how much you’ve compensated them to the IRS for tax purposes.
What is an independent contractor?
Before we dive into the forms themselves, there are a few important things to define in the context of an IRS information return.
First, it’s important to note that W9 and 1099 forms do not apply to W-2 employees. The IRS distinguishes between employees and independent contractors, and treats these two worker classifications differently. Having a clear understanding of which of your workers are classified as independent contractors is a very important first step.
For the IRS, a contractor is defined as a self-employed person who is engaged by a business or company to provide a specific deliverable on an established timeline, while still maintaining complete control over when, where, and how exactly they go about completing this work.
An employee, on the other hand, has a long-term working relationship with their employer. Their employer has trained them and established clear parameters regarding their job duties and when and where they are to complete their work. Employers are also responsible for abiding by state and federal laws pertaining to workers’ rights, like ensuring they get benefits and overtime if their schedule meets certain requirements.
While business owners are obligated to oversee tax withholding, Social Security, and Medicare taxes for employees’ wages, contractors are responsible for handling their own withholding while abiding by the state and federal laws relevant to the place they live. The W9 and 1099 forms play an important role in this process.
What is the W9 form?
The W9 is a request form that allows you to gain access to your independent contractor’s taxpayer identification numbers and certification, which you’ll need to complete the obligatory tax reporting for work done with a contractor. This form provides basic identifying information about your contractor and allows you to file an information return with the IRS on their behalf, which you’re legally obligated to do as a small business owner. It also allows you to report things like income they’ve received from you, contributions made toward an individual retirement account (IRA), or any real estate transactions that may have occurred during your working relationship.
The W9 form asks for the contractor’s legal name, home address, and taxpayer identification number (TIN). The TIN may be either their Social Security number (SSN) or, if they are operating as their own business, their employer identification number (EIN).
The IRS only requires one of these identification numbers, so if they have an EIN, no Social Security Number will be necessary. Every independent contractor you work with who expects to complete more than $600 worth of work for you in a year will need to complete a W9. If they do not present you with a completed W9, you’ll need to withhold 28% of their income for taxes. This is required by law.
What is the 1099 form?
The 1099 form is a document used to report what the IRS refers to as “miscellaneous income” or “additional income.” There are different iterations used for different purposes, so carefully evaluate which one is relevant based on your individual circumstances. Typically, for contractors, the 1099-MISC is the one to use. Again, you’ll need to prepare a 1099 for any contractor who has earned over $600 from doing work for your business.
The important information to report on the 1099 is the name and address of the contractor, along with the TIN for both the paying entity (your small business) and the payee (your contractor), as well as the total amount they received from their work with your business during the year. You’ll send one copy of the 1099 to the contractor, and submit another to the IRS.
What are the key differences between the W9 vs. 1099?
BThe ability to clearly understand the distinctions between the W9 vs. 1099 forms will help as you move through the process of filing taxes as a small business owner. Here are the three key differences for you to take note of:
- What the forms are collecting: The W9 collects an independent contractor’s tax information for your use as their employer in reporting to the IRS. The 1099 form is used to report how much you paid the contractor during a given tax year.
- Who’s completing the form: The W9 is completed by the contractor, while you as the business owner complete the 1099 and submit copies to both the contractor and the IRS.
- When the form is completed: Ideally, the W9 is completed at the outset of your working relationship with the contractor, and updated in the event that any information changes. The 1099, on the other hand, is completed each year you pay a contractor more than $600. Form 1099 must be provided to a contractor by January 31.
Despite their differences, both the W9 and 1099 tax forms are important and necessary for establishing a working relationship with independent contractors in your business.
Now that you more fully understand the W9 vs. 1099 forms and why they matter, it will be easier to create a system for working with them as you develop relationships with new independent contractors. These forms aren’t complicated and take very little time to complete, but making sure you get the details right and the forms sent out in a timely fashion can make a huge difference when tax season rolls around.