W9 vs 1099: A Simple Guide to Contractor Tax Forms Bench Accounting

You won’t know exactly how much tax you owe until you file your personal tax return at the end of the year. But you’ll want to spend time estimating this because if you underpay your estimated taxes, you https://accounting-services.net/what-is-the-difference-between-bookkeeping-and/ could be subject to penalties. Many employers prefer to hire independent contractors rather than employees whenever possible. This can allow independent contractors to negotiate better compensation.

The IRS requires contractors to fill out a Form W-9, request for Taxpayer Identification Number and Certification, which you should keep on file for at least four years after the hiring. This form is used to request the correct name and Taxpayer Identification Number, or TIN, of the worker or their entity. A TIN may be either a Social Security Number (SSN), or an Employer Identification Number (EIN). Make sure the contractor checks the box exempting him from tax withholding. As a separate business entity, the IC should file his or her own self-employment taxes. Zenefits preps and stores this document for companies that hire and pay contractors through the platform.

Taxes 1099 independent contractors need to pay (aka tax liability)

The 1099-NEC is due by Jan. 31, and the 1099-S and 1099-B are due by Feb. 15. If an employer doesn’t provide a correct 1099, the penalty is $570; that fine is per contractor, not a flat fee. For example, if an employer has five contractors and doesn’t give them 1099-NECs, the employer could pay fees of up to $2,850.

You’ll also need to send the form to each independent contractor no later than January 31st of the following year so that they can submit their own tax forms. For example, if January 31st falls on a holiday or weekend, the date for filing may move to the next business day. Do you plan to pay your newly hired independent contractor $600 or more for his or her services, rents or other income payments? If so, you must fill out Form 1099-MISC (“Miscellaneous Income”) with the total amount you paid him or her during the year and the contractor information you obtained from Form W-9. Then, you will need to supply a duplicate of the completed form to the contractor and another copy to the IRS by January 31 of the year following payment.

What is an independent contractor?

You’ll see each of these terms (SSN, EIN, TIN) on contractor tax forms, so make sure you know what they mean. Speaking of tax returns, both types of workers file a Form 1040 when completing their tax returns. Keep in mind that the IRS indicates certain Similarities & Differences Between Accounting & Bookkeeping types of payments do not need reporting on Form 1099-MISC. For example, you may not need to include payments to a corporation (including a limited liability company (LLC) treated as a C or S corporation or payments to tax-exempt organizations.

Independent contractors often need to make estimated tax payments throughout the year because businesses usually don’t withhold taxes for independent contractors. IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, helps companies determine whether they’re at risk of worker misclassification. It is not a mandatory document.The line between independent contractors and full-time employees isn’t always clear, but the penalties for misclassifying workers are severe.

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However, you must exercise sound judgment when classifying workers and thereby in distinguishing whether a worker is an employee versus an independent contractor. There are exemptions that exclude some independent contractors from needing to be reported (i.e., if the recipient was a corporation). Filers who work as independent contractors may request tax withholdings but the process is not required for all 1099 forms.

• Keep all invoices on file, and make sure they coordinate with Form 1099-MISC.
• For example, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee.
• For information on the other forms, consult the IRS website or your accountant.
• Some of these deductions, along with the employer’s payments to unemployment tax and FICA, are then filed with government agencies at specified deadlines.
• If you’ve ever worked for someone, you’ve probably seen these withholdings on your paystub.

One of the benefits of being self-employed is that you can deduct business-related expenses to reduce your taxable income. Remember, clients that paid you less than $600 don’t have to issue one — and some clients may not send one, even though they’re supposed to. Each 1099 form must be hand delivered or sent in the mail on or before February 1.

Making tax season a breeze

Employers are nevertheless advised to use a W-9 to obtain a contractor’s TIN or SSN, because filing false information on a W-9 is illegal. Using the proper forms can protect employers from facing penalties for false information filed with the IRS. Independent contractors, not employers, are liable for incorrect information provided on Form W-9. The main difference is the degree of control that an individual exerts over his/her work.

Alternatively, a freelancer should voluntarily provide a completed W-9 to each client before they start working. Because the information on Form W-9 rarely varies by employer, the completed form is quick and easy for independent contractors to share. The Information Returns Intake System (IRIS) Taxpayer Portal is a system that provides a no cost online method for you to electronically file Forms 1099.