As an employer, Form W-9, an IRS form is used to gather information about a contractor (like names and addresses) so that their earnings can be reported at year-end. Form 1099 (1099-NEC) is the document that’s issued to contractors at year-end if they earned $600 or more so that they can report and pay taxes on the earnings you paid them.
As a small business, collecting W-9s and filing 1099s can be a payroll nightmare, especially if you’re managing multiple contractors. Gusto, a payroll software, makes it easy for 1099 workers to enter W-9 information through their self-service portal—no paper required. It also automatically files your 1099s and sends them to both your contractors and the IRS. Sign up for a free trial of Gusto to start paying your independent contractors today.
Disclaimer: Tax laws change frequently. For the most up-to-date information please refer to the IRS.gov website or your tax accountant.
When to use Form W-9 vs Form 1099
The best time to gather contractor data on a W-9 is when you first begin working with the contractor. That way, if they earn over $600 in the tax year, you’ll already have the information needed to complete the year-end 1099. You’ll issue the 1099-NEC form at year-end for any contractor who has earned $600 or more during the tax year–no later than the following Jan. 31.
Please note: A copy of the 1099 is sent to the contractor as well as to the IRS.
The IRS has many rules and caveats for when to use a W-9 vs 1099 and what kind of 1099 to use. The illustration below shows how the information provided on the W-9 can result in many different 1099s, all of which are used for different business reasons. However, this article will focus primarily on payments to contractors, resulting in a 1099-NEC being issued at year-end.
What Is the W-9 Form
Form W-9, Request for Taxpayer Identification Number and Certification, is an IRS document used to gather data your business needs to report to the IRS at year-end. However, since IRS forms change, your best option is to use the IRS website as your primary source for any IRS tax forms or instructions. You’ll find detailed directions there to help your contractors complete the form correctly.
Once your contractor completes the W-9, keep a copy of it on file in case you’re ever audited. The completed and signed W-9 demonstrates that you gathered the correct data for the taxpayer. The IRS does not need a copy of this document.
Where to Find the W-9
You can download the W-9 document and instructions in English or Spanish from the IRS website using the links below, or go directly to IRS.gov and search for “W-9.”
- Download a blank copy of the W-9 Form
- Download a blank copy of the W-9SP Form (in Spanish)
- View instructions to complete Form W-9
What to Fill Out on the W-9
Once you understand what the W-9 is, it’s easy to comprehend why you need to collect the proper information. While most of the data fields are self-explanatory, like name, address, and tax classification, a common question is: What is a TIN?
The TIN (Taxpayer Identification Number) is issued either by the Social Security Administration (SSA) or the IRS. It is used by the latter in the administration of tax laws.
For independent contractors who don’t have a business entity, it’s their Social Security number. Business owners and contractors use their federal employer ID number as their TIN.
If the contractor doesn’t provide a TIN, you must withhold 24% for federal taxes per IRS regulations. In turn, this should be reported on the 1099-NEC at year-end. If you have trouble filling out the W-9, the IRS website has instructions and resources to help.
What Is the 1099-NEC Form
The 1099-NEC is an IRS document that’s used to report all kinds of income, such as that received by an independent contractor for work provided to a business or private employer. It’s like an employee’s year-end W-2 with similar data fields but is used by businesses that pay non-employee contractors, such as freelancers or contract workers.
Typically, you should use a 1099-NEC to report payments made to a contractor who earns $600 or more in a tax year. However, there are other reasons a person might receive a 1099-NEC.
Here are a few alternative scenarios in which a 1099-NEC is needed:
- Report crop insurance proceeds: Money insurance companies pay farmers for crops that are damaged or destroyed
- Record fishing boat proceeds: For self-employed crew members earning money on a fishing boat or vessel
- Disclose golden parachute payments: Severance pay, cash bonuses, and stock options given to terminated employees
For typical contractors, those boxes will remain blank on the report. Like the W-9, the 1099-NEC, as well as instructions to use it and a definition of every field, are available to view or download by searching for “1099” on the IRS website.
Where to Find the 1099
You can download the 1099 document and instructions by using the links below or going directly to IRS.gov and searching for “1099-NEC.” The 1099-NEC is not yet available in Spanish.
The best payroll software makes it easy to import payroll data into an electronic 1099 form so that you don’t have to download or purchase and mail paper copies. This saves you from having to spend money on forms and stamps and provides more accuracy than calculating earnings manually.
What to Fill Out On the 1099
For a 1099-NEC, you’ll add your information under “Payer’s Name” and the contractor’s information under “Recipient’s Name.” Then, you’ll show how much you paid in gross income, in Box #3, “Other Income.” You’re not likely to have taken out federal or state income taxes, so leave those boxes blank. Check out our complete article on the IRS 1099 form reporting or download the 1099-NEC instructions for more details.
Rules for Nonresident Aliens and Foreign Entities
Although the 1099 is used for reporting payments to independent contractors, if the contractor is a non-resident alien or foreign business entity, an IRS Form 1042-S is used instead. This form accounts for unique tax withholding rates and foreign treaties. The IRS provides a webinar on 1042-S that explains what a 1042-S is and when to use it.
Other Kinds of 1099s
Because W-9s are used to gather information for all kinds of future 1099 payments, we’ve included a few of the common 1099s below. Each 1099 is linked to the IRS webpage where the downloadable documents and instructions for using them can be found.
- 1099-MISC: Used to report miscellaneous income (rents, prizes, and other income payments)
- 1099-DIV: Used to report dividend income and distributions
- 1099-C: Used for cancellation of debt in amounts of $600 or more
- 1099-K: Used for merchant cards and third-party network payments
- 1099-INT: Used to report interest income in amounts of $10 or more
- 1099-S: Used to report proceeds from real estate transactions
Common Mistakes When Issuing 1099s
While IRS rules are pretty clear, there are little mistakes that may require you to re-issue a 1099. For example, make sure your 1099 form includes the full name of the contractor. Double-check the spelling, TIN number, and the payment amount. You don’t want the contractor to have to pay taxes on $6,000 when they only earned $600.
Other common mistakes include:
- Issuing 1099s to employees: Employees should receive W-2s instead.
- Issuing 1099s to corporations: You don’t need to. Only independent contractors that work for you need 1099s. If you hire a corporate business to do a service, like clean your office each week, no 1099 is needed.
- Missing the Jan. 31 due date: You must submit all 1099-NEC forms with non-employee compensation (in “Box 7” of the 1099) by Jan.31 of the year following the year for which you’re reporting. Other reported income may be submitted later.
- Sending wrong 1099 copy to IRS: The IRS provides five copies of the 1099 online, one each for federal and state returns, the contractor, and your records. It also gives an example (that shouldn’t be printed and submitted) of the original one you will submit to the IRS. Printing and submitting this copy (the copy in red ink) can lead to penalties.
- Filing the wrong type of 1099 form: There are numerous 1099 forms. 1099-NEC is what you need to submit to report income for independent contractors.
Penalties for Not Submitting a 1099
Aside from having to reissue incorrect 1099s, you are subject to penalties. The IRS has increased penalties associated with 1099s in 2021, and as a result, you could end up paying up to $270 per return if you’re not careful. You can be charged separate penalties for not filing correct 1099 copies with the IRS or for not submitting them to your contract workers.
You may incur the following penalties if you fail to file 1099s timely and accurately:
Penalty Per Return
More than 30 days late
More than 30 days late but before Aug. 1
Filed on or after Aug. 1
Intentionally neglecting to file
If your business averages annual gross receipts of $5 million or less for the three most recent tax years, your maximum penalties are less than penalties the IRS charges larger companies. If you file the reports before the Aug.1 deadline, you can be charged a maximum fee of $556,500. If you fail to file by Aug. 1 or never file them at all, you can be charged up to $1,113,000.
If you intentionally file a fraudulent information return for payments you claim to have made to another person, you may be liable for damages. The person can sue you for up to $5,000 or more in civil damages.
Why You Need Tax Forms for Contract Workers
When processing payroll for contractors, you’re not required to withhold or pay taxes, such as FICA. However, gathering, tracking, and reporting their earnings on the appropriate payroll form is vital because the IRS requires them to pay taxes on their own.
Although you’re not responsible for making sure your contract workers pay taxes, you do have the burden of ensuring they receive accurate earnings information by Jan. 31 of the following year to comply; otherwise, you can be penalized.
The relationship between a W-9 and 1099 is that the W-9 gathers the data that’s later reported to the IRS on a 1099-NEC for contractors that you pay $600 or more in a tax year. A copy of the W-9 is kept in your business files, while copies of the 1099-NEC are provided to the IRS and to your contractor. The contractor then uses the 1099 to report their income when filing their taxes.
If you’re currently working with 1099 contractors or considering doing so in the near future, consider using Gusto. Its system lets contractors submit W-9 information online that transfers to electronic 1099s you’ll send to your contractors and the IRS. Gusto also makes it easy to make direct deposit payments and helps you stay compliant with all federal and state employment laws. Sign up for its contractor-only plan now and get 30 days free.
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