If you hire any freelancers or vendors, you’re going to need to issue two forms to them: W-9 and 1099.
But, what’s the difference between W-9 vs 1099 forms? We’re so glad you asked!
As a business owner, you’re in charge of issuing 1099s, and the majority of the time, it’s for either non-employee compensation or miscellaneous compensation. But how do you know who to issue 1099s to?
That’s where W-9s come in. The W-9 form is for vendors, freelancers, and any other people who are paid what’s called “non-employee compensation” from a business. In other words, they’re different from your business’s salaried employees because you pay them on a contract basis, and you typically do not control when or how they do their work.
Box 3 on the W-9 form asks for the entity’s federal tax classification – i.e. partnership, LLC, individual, etc. This answer dictates whether that person should receive a 1099 because some tax classifications require a 1099, while others don’t.
In order to understand the difference between W-9 vs 1099 forms, we need to backtrack. W-9s should be issued before any checks are cut to your contractors, meaning that they’re also sent well before the 1099 form.
The W-9 form is essentially independent contractor paperwork – getting their name, address, social security number, and a few other pieces of information for tax purposes.
The IRS guidelines recommend that businesses collect a W-9 prior to issuing any payment. In other words, if you issue a check before receiving a W-9, you can actually be on the hook for your contractor’s tax payments – or in tax jargon: backup withholding.
What is backup withholding?
According to the American tax administration, backup withholding requires payers to withhold and pay 24% of earnings to the IRS on Form 1099 if there is an improper taxpayer identification number (TIN) on the corresponding W-9 form.
Long story short, the IRS more often than not puts the burden on the person issuing the payment. If you don’t have a correct and complete W-9 (or one at all) for each of your contractors, you could be held liable for backup withholding. AKA, you’re stuck paying an additional 24% on top of what you already paid your contractor.
And let’s be real…24% is a big hit just for missing a few details!
Tips for business owners issuing W-9s and 1099s
1. Use a secure software to deliver W-9s
Email is probably not the best way to collect W-9 form fills. Contractors are putting sensitive information on W-9s, such as social security numbers.
Acuity uses a secure software called Track1099 by Avalara. That way, people are logging in and filling out the form securely, rather than emailing it over to us or printing it out, which can leave your contractor’s information vulnerable to hackers.
2. How to fill out the form correctly, and common pitfalls
For whatever reason, people commonly miss filling out Box 3 of the W-9 form. Box 3 determines if they need a 1099 or not. For example: C-Corporations are exempt, individuals/sole proprietorships receive 1099s.
Double check whether your contractor fills out Box 3 correctly, and follow up for missing information if needed.
3. You need to ask for new/updated forms with any changes
Upon issuing the W-9 forms, we recommend asking people to inform you of any changes. If you have a long-time contractor, check in with them once per year for any changes to personal information as they will need to fill out a new form.
4. Collect email addresses
We strongly recommend collecting an email address, too, when you issue W-9s. What if your contractor’s mailing address has changed without your knowledge?
People don’t change their email addresses nearly as often as they move, so you’re more likely to successfully deliver 1099s via email. Track1099 sends a link via email to the recipient to login and view the 1099 so that the form is securely delivered!
5. Caution to businesses managing their accounts payable (AP)
Long story short, businesses who are managing their own AP should receive W-9s prior to issuing any payment. We’ve seen some clients who manage their own AP and do not issue W-9s throughout the year. Don’t fall into this trap!
Issue as you go because it will not only make your life easier, it will make your accountant’s life easier, too.
W-9 vs 1099: More resources for you!
We hope this helped answer some of your burning questions about the difference between W-9 vs 1099 forms. See more FAQs below, too.
Looking for more information about filing 1099s? Check out our recent blog article: The 1099 Form: What You Need To Know About Filing In 2022.
And if you’re ready to outsource your AP, bookkeeping, or tax services, reach out to our team today! We can help with categorization and reconciliation, managing your bills, filing your business tax returns, and more.
Q: Do independent contractors pay taxes?
A: Yes, paying taxes as a contractor is a federal tax requirement. Generally speaking, independent contractors are required to pay income tax and self-employment tax.
However, if you’re paying an independent contractor, you are not liable to pay taxes on their behalf – unless, of course, you pay a contractor before receiving their W-9 (like we mentioned above).
Q: What forms do independent contractors fill out?
As far as tax forms go, independent contractors need to fill out a W-9 form. This will contain their basic personal information as well as their taxpayer identification number (TIN), which are needed for a 1099 (the contractor tax form).
Q: What paperwork do I need for a 1099 employee?
A: So technically speaking, “employees” will not receive a 1099. 1099 forms are issued to “non-employees,” AKA a type of contractor.
There are a few important legal differences between an employee and an independent contractor. According to the IRS, this distinction comes down to the relationship between the worker and the business.
You typically hire employees to do specific work under your direction and control. Independent contractors, on the other hand, work autonomously on a project basis, with the ability to control when and how they do their work.
In addition, an employee is on your payroll and you must withhold their taxes, while you pay an independent contractor on a per project basis, and they are in charge of withholding their own taxes.
So in terms of tax forms, contractors do not fill out the same form as an employee. Employees fill out a W-4 form to dictate how much tax should be withheld from their paycheck.
On the flip side, W-9s are purely informational, and thus, no tax is withheld from a contractor’s paycheck. The amount each contractor owes come tax season depends on how much they make throughout the year.
With those clarifications, you need to issue a W-9 form to anyone who qualifies for a 1099 tax form. For more information about W-9 vs 1099 forms, reference what we wrote above.