Mar 04, 2021How to Use 1099 and W9 Forms Effectively
If you’re a small business owner, you have to be scrappy. Whether you’ve kept an archaic computer for too many years or outsourced your entire shipping and packaging line to your children, you’re likely intimately familiar with cutting costs.
One well-known cost-savings practice is hiring independent contractors. For example, you might outsource one or two projects to a freelance web designer instead of hiring someone in-house. It’s important to note that treating an independent contractor like an actual employee comes with potentially serious tax penalties. This article discusses people who you both classify and treat like a contractor.
Although not every business scenario calls for a contractor (we still need our trusty employees), companies need to be sure that contractor payments are handled carefully. Without appropriately reporting payments, you could be liable for up to 28% of whatever you paid the contractor (in addition to what you’ve already paid them).
Since none of us are over eager to pay an extra 28%, let’s explore ways to reduce those risks with the 1099 and W9 forms.
What is the 1099-NEC form?
The 1099-NEC form (formerly known as the 1099-MISC) is a way for the IRS to track and report income from businesses to independent contractors. Since contractors aren’t registered with the company, the IRS has a more difficult time tracking payments. However, the IRS wants their money. The 1099 form is a way for you to report payments so that the contractor’s income is taxed appropriately.
Here is a short list of contractors who you’ll need to submit a 1099 for:
- they provided a service, not a product
- you paid them at least $600 within a calendar year
- their business is not classified a corporation (C-Corp, S-Corp, or LLC filing as a C- or S-Corp)
- the corporation rule doesn’t apply to attorneys: you must provide a 1099-NEC form for all attorney fees
- you didn’t pay with a credit or debit card
Using W9s to help file 1099s
In your normal course of business, you’ll likely know the answer to every criteria in the bulleted list above, except for what the contractor’s business classification is.
The W9 is a simple form that states the business or individual’s name, tax classification, address, and tax ID. (Pro tip: If the business has “Inc” or “Corp” at the end of their name, you already know they’re a corporation.) Although the IRS doesn’t require copies of W9 forms, it will be helpful to use them to collect the information required for 1099s.
To find out whether or not the business is a corporation, ask the contractor for a W9 form before making your first payment (this ensures you actually receive a copy).
How do I file a 1099 form?
Just like filing your tax return, there are many ways to file a 1099 form. You can mail in paper forms, but your accounting software will likely be the most intuitive.
Hard copy submission: Must be received by your IRS processing center by February 28th.
Online through IRS: You can now submit 1099 forms electronically via the IRS’s online submission service, Filing a Return Electronically (FIRE). Here’s how:
- Request a Transmitter Control Code (TCC) from the IRS via form 4419. (Must be completed at least a month before the 1099 filing deadline.)
- Create a FIRE system account
- Complete your 1099s
- Submit the document via the FIRE system
As an alternative to submitting online through the IRS, you may choose to utilize another online software. For example, tax1099.com helps accountants organize 1099 vendors, manage workflows, and file necessary documents. Another great platform is Quickbooks. Many versions of Quickbooks allow you to flag vendors as 1099 vendors, saving their address and tax ID. At the end of the year, you can easily select 1099 vendors and forward the correct forms over to them.
What are the 1099 deadlines?
Jan 1-31: Make a list of vendors who received more than $600 for services the previous year and request a W9 from each one (attach a blank form for convenience)
Jan 31: File hard copy forms with the IRS (not required if submitting electronically)
Jan 31: File electronic copies with the IRS
If a vendor refuses to provide a W9 form, you are responsible for withholding 28% of your payment and forwarding that to the IRS. If you don’t issue a 1099 form, you could be responsible for the 28% and what you’ve already paid the contractor. Our recommendation? If they aren't willing to complete a W9 form, hire a different contractor.
What if I haven’t filed a 1099 in the past?
You have some risk of tax liability to the IRS, since the burden of tax proof lies with the company. If the contractor can’t or won’t prove their taxed payments on their return, you will be responsible for paying the IRS up to 28% of what you paid to the vendor.
When dealing with the IRS, the best advice we can give is to avoid getting on its bad side by neglecting it. Be proactive in collecting W9s from previous and current contractors, and you’ll be in good shape.
If you haven’t filed 1099 documents in the past, start now. Make collecting W9s and 1099s a standard business process from now on.