Is there anything more confusing or nerve-wracking than doing your own taxes?
The endless forms and confusing paperwork are enough to rattle even the most confident mathematician. And if you’re a small business owner, there’s a chance you’re dealing with some new paperwork you’re totally unfamiliar with. While it may seem confusing on the surface, these tax forms actually very easy to understand once you know the difference.
Do you need a W-9 for a 1099?
Yes, a W-9 is used to collect information from independent contractors and a 1099 is used to record how much they’ve paid that independent contractor. You need both to file your taxes.
At a very high-level the difference between these two forms is simple. A W-9 form is used by the IRS to gather information about an independent contractor so that their earnings can be reported at the end of the year. On the other hand, a 1099 form is the paperwork used to report how much that contractor earned at the end of the year.
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Now you know the difference between these forms, but when is the right time to use them? When you take on work with a client as an independent contractor, you should fill out a W-9 form. This form collects your Tax-payer Identification Number (TIN) and other relevant information.
As for the 1099, that just needs to be complete along with your other tax paperwork before the end of January. It’s important to note that there are different types of 1099 forms and you’ll want to select the right one for the type of work you do.
Below is a deep-dive into the differences between Form W-9 and Form 1099:
Used to collect tax information from independent contractors
Used to record how much an independent contractor was paid over a year
Submitted once, and then again only if contractor’s information changes
Submitted yearly any year contractor has been paid more than $600 by client
Contractor fills it out
Client fills it out
Provides client with contractor’s contact info and tax number
Provides contractor and IRS with summary of how much client paid contractor
Client sends a blank copy to contractor, who then returns it to client
Client sends one filled out copy to the contractor, and one to the IRS
To be completed before the contractor begins working for client
Should be sent to contractor and IRS before the end of January
These subtle differences between a W-9 and Form 1099 are important to note. Keep a close eye on who is responsible for each form, when it needs to be filed, and what information is needed. A simple mistake on one of these forms could cost you a fortune in back-taxes.
What is an independent contractor?
An independent contractor is essentially a temporary employee. They sign a separate contract with a company to work for a limited period of time, often in a specific project.
Independent contractors don’t go through the same hiring process as employees and are not paid the same way employees are paid. For this reason, the paperwork filed for independent contractors is different than a full-time employee.
Why you need different tax forms for contract workers
The IRS isn’t just sending out different paperwork for the fun of it. As a business owner, you’re not required to withhold or pay taxes when doing payroll for independent contractors.
You are expected to gather, track, and report their earnings because the IRS requires them to pay taxes on their own. Though you’re not responsible for making sure your contractor pays their taxes, you do have a responsibility to ensure they receive accurate earnings information by Jan. 31 of the following year.
Without this information your contract workers can’t pay their taxes and the IRS will likely find you liable if it’s decided you didn’t file the correct forms.
How to complete a W-9
If you’re a contractor, you’ll be responsible for completing a W-9 and returning it to the business owner upon completion. If you’re a client, you’re responsible for ensuring you have a complete W-9 from any contract employees before they begin work.
Here are five simple steps for filling out a W-9 form:
1. Provide your full legal name and the name of your business, if you have one as an independent contractor. If not you can leave the second line blank.
2. Check the box that most accurately describes your business. In many cases that will simply be the “individual or sole proprietor” box, but there are exceptions.
3. Provide your personal information and address.
4. Complete your social security number (SSN) and employee identification number (EIN).
5. Finalize with your signature.
Let's take a look at what that looks like on the form itself:
Once you’ve completed this form you should return it to the business owner you’re doing your contract work for. If you own an LLC or your own business as a contractor, you’ll want to pay close attention to the section section of form W-9. If you're a business owner, you should keep a copy of the W-9 provided by your independent contractors. You will need this form to complete form 1099.
How to complete form 1099
As a business owner who employs independent contractors, you’ll be required to complete a 1099 for any independent contractors you have on your payroll.
Using the information given to you on form W-9, you’ll complete form 1099 and send a copy to both the independent contractor and the IRS. This must be done before the end of January before taxes are due. It’s also smart to keep a copy for yourself in-case an issue arises with your tax-filing.
How to fill out form 1099
You’ll need the following information to complete form 1099: your Federal Tax ID number, which could be your SSN or EIN and the contractor’s information, which includes their SSN or EIN. The contractor information can be found on their completed W-9.
Here are four simple steps for filling out a 1099 form:
1: Complete your personal details in the box in the top-left corner, including your full name, home address, contact number, etc.
2: Fill in your tax ID number. If you're an independent contractor, use your social security number. If you're the business owner, use your business taxpayer ID number.
3: As a business owner, enter the contractor's tax ID number, then enter their personal information under this box - all of this information can be found on form W-9.
4. Enter the total amount you paid the independent contractor in box 7. If you're self-employed, you can enter the total amount earned from the employer in box 7, if it is not already filled out.
Here's how that might look on the form itself:
Each 1099 should include the amount of money paid to the contractor, which is entered in Box 7 under the title “Non-employee compensation.” If you withhold any earnings from the contractor, you will also need to fill in Box 4 or 11 in relation to any federal or state income tax you withheld.
Finally, confirm that all the information provided by the independent contractor is accurate. You’ll need to complete this process for each contractor you’ve worked with over the last year. Many enterprise companies with a large number of contractors will employ the help of a corporate tax software solution to help automate the process.
These software solutions allow this information is automatically generated and entered for you, saving you time and reducing any potential for human error. If you have enough contractors on payroll it could save you time and money.
Interested in incorporating a corporate tax software solution into your business?
How to file a 1099 form with the IRS
Once you’ve completed form 1099 for your contractors, it’s time to send everything to the right people. All of these forms must be completed and filed before January 31. Both the IRS and the independent contractor must receive a copy of form 1099.
Here’s how you file form 1099:
To be sent to the IRS: Copy A
To be sent to the state tax department: Copy 1
To be sent to the contractor: Copy B and Copy 2
To keep for your own records: Copy C
Finally, as a business you will also need to submit 1096 form to the IRS. This form is a summary of all of the 1099 forms you have submitted for each independent contractor. Form 1096 must also be submitted by January 31.
Now let’s get in FORMation
The truth is once you finish the process for completing one W-9 and 1099 combo, you’ll be a pro the next time you have to do it. These things can be tedious but doing them correctly is important! If you ever have doubts you can always check the IRS website for more detailed information.
Interested in learning more for your small business? Check out our complete guide on small business taxes!
Lauren is a Content Marketing Manager at G2. You can find her work featured on CNBC, Yahoo Finance, and on the G2 Learning Hub. In her free time, Lauren enjoys watching true crime shows and spending time in the Chicago karaoke scene. (she/her/hers)