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W-9 vs. 1099 | A Comprehensive Guide To Contractor Tax Forms

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Today, working with independent contractors is one of the best ways to tap into the global talent pool and work with experts across domains. While this has become an increasingly common practice, employers still have some reservations, primarily because of the legal and tax complications.  There are numerous tax forms that you need to fill out and submit while working with contractors, however, forms W-9 and 1099 are the most common ones. Both these forms are a part of the same process; however, there are some key differences between them.

Let’s first understand the W-9 and 1099 forms.

W-9 and 1099 forms – Explained

The W-9 form

The W-9 form is one of the most basic tax forms in the US used for filing. It contains details like the contractor’s name, residential address, and Tax Identification Number (TIN)/Social Security Number. The contractor must fill out this form and submit it to the client/employer, ideally during the hiring process. The employer uses the details from this form later to issue form 1099 at the end of the year.

The 1099 form

When you look at an independent contractor vs. employee, the W-2 form is issued to record income information for full-time employees, and the 1099 form is used for part-time workers or contractors. This form helps the IRS identify the income you have sourced from one client/organization during the course of the year. It is mandatory for any employer to issue the 1099 form to its contractors if they have paid them more than $600 in one year.
In total, there are 21 different kinds of 1099 forms. However, the most commonly used ones are 1099-NEC and 1099-MISC.

  • NEC stands for Nonemployee Compensation. Form 1099-NEC is used to report revenue for sole proprietors who own their businesses or LLCs who provide services to their clients. The clients are required to send a copy of this form to their contractors before January 31st. This form is one of the most common forms used to report business payments.
  • MISC stands for miscellaneous, and form 1099-MISC is used to report personal income from sources like rent, dividends, royalties, etc. It is also used in cases like direct sales of consumer products worth more than $5,000. Up until 2020, forms 1099-NEC and 1099-MISC were not segregated, and a single form was used for both personal and business payments.

Now that you have an understanding of W-9 and 1099 forms, here are some of the key differences between these forms.

W-9 vs. 1099 – What are the differences?

Forms W-9 and 1099 are equally important for generating a detailed revenue and tax report at the end of the year. While contractors use W-9 to identify themselves, the 1099 is used by employers to record business transactions and submit them to the IRS.

Here are some of the major points in the W-9 vs. 1099 comparison:

W-9 1099
Documents contractors’ tax information Documents the earnings of a contractor in one year
Filled out by contractors Filled out by clients/employers
Submission to the IRS is not mandatory Needs to be submitted to the IRS by January 31st
Can be filled out once and reused unless the information is changed Needs to be filled out every year if earnings are more than $600

W-9 vs. 1099 – Who should fill them out?

It is clear that both these forms are crucial for documenting information and reporting income. However, the clients and the employers both play separate roles here.

  • The W-9 form is filled out by the contractor. Here the most important piece of information is the Tax Identification Number (TIN) or the Social Security Number. Employers/clients use these details to report the contractor’s income to the IRS through form 1099.
  • The 1099 form comes into the picture at the end of the year when clients document the total payments made to one contractor. If the payments amount to a figure more than $600, the client needs to submit a copy of this form to the IRS and send a copy to the contractor on or before January 31st. The contractor must clear any taxes applicable to this income.

How to fill out forms W-9 and 1099?

Contractors are responsible for keeping a W-9 form handy, which should be submitted to the clients when the independent contractor agreement is signed. The steps you need to follow to properly fill out form W-9 are:

  1. You can download the W-9 form through the IRS’s official website.
  2. Once you have a copy of the form, note down your full name, the name of your business (if any), and the type of business.
  3. Fill out your personal information, including address, contact details, etc.
  4. Enter a valid Tax Identification Number or Social Security Number. Sole proprietors with a valid EIN (employee identification number) can use this number as well.
  5. Complete the form with your signature.

At the end of the year, the clients are responsible for filling out form 1099. The steps you need to follow to fill out this form are:

  1. You can download the W-9 form through the IRS’s official website.
  2. Fill in your personal details. You must use the business taxpayer ID if you run your own business. If you are a sole proprietor, you can use your EIN or SSN.
  3. Fill in the contractor’s personal information and TIN. These details can be found on the W-9 form.
  4. In box 7, enter the total amount you have paid to a contractor in one year.
  5. Finalize the document and send a copy to the IRS and the contractor.

What happens if you do not submit forms W-9 and 1099?

Forms W-9 and 1099 are federal documents, and they must be submitted wherever required. In case these documents are not submitted, it leads to a case of non-compliance, and you will be charged with a fine.

Penalties for non-submission of form W-9

If a contractor fails to submit the W-9 form along with the correct TIN, a penalty of $50 will be levied for every instance of non-compliance. This fine can be waived if the non-compliance was not willful in nature. If a contractor willfully provides an invalid TIN, fines of up to $500 can be applied. Multiple instances of willful non-compliance can lead to serious fines and imprisonment.

Penalties for non-submission of form 1099

If a business fails to submit form 1099 before the deadline, a fine between $50 and $280 will be charged per form, depending on the timelines. However, if a business willfully withholds the income statement, a minimum fine of $570, or 10% of the income withheld, will be levied.

In general, it is the contractor’s responsibility to pay their income taxes. However, there are cases where contractors fail to provide a valid TIN, making it difficult for the IRS to track their income. In cases like these, it is the client’s responsibility to pay the taxes on their end. This is where backup withholding comes in. Backup withholding is a practice where clients withhold 20% of their contractor’s earnings when they do not receive a proper TIN or SSN.

The amount that has been withheld for taxes must be reported in boxes 4 and 11 on form 1099.

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Managing contractor taxes is a challenge, but paying contractors, in general, is also a challenge, especially if you are dealing with multiple contractors across states and countries.

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