W-9 vs. 1099What's the Difference?

When you’re employing the services of an independent contractor or freelancer, you have to keep these two things in mind:

• The independent contractors or freelancers are not your employees
• The IRS is very particular when it comes to classifying employees and independent contractors

The first point is pretty much self-explanatory.

Since you don’t have an employer-employee relationship with independent contractors or freelancers, it stands to reason that they’re not your employees.

That said, we’ll have to expound on the second point more.

The IRS imposes stiff penalties when you misclassify your employees as independent contractors (and vice versa).

That’s why you have to be mindful when you’re dealing with independent contractors.

Along with that, you also have to learn of the tax forms that you need to file regarding the income payments you made to them.

There are two tax forms that you need to keep in mind when working with independent contractors or freelancers:

• Form W-9
• Form 1099, particularly 1099-NEC

Aside from just the name, these two forms serve different purposes.

Form W-9 contains significant information about the independent contractor.

The information on a Form W-9 will then be used when you file a 1099-NEC form.

Form 1099-NEC is an information return that reports all the income payments made to a certain independent contractor.

The independent contractor can use the 1099-NEC form to supplement his/her IRS Form 1040.

In this article, we will be learning the differences between these two forms.

Who is responsible for completing a W-9 form?

How about a 1099-NEC form?

Do you need to submit a copy of the W-9 form to the IRS?

What about the 1099-NEC form?

Does the IRS require that you file a copy of it?

We’ll be answering these questions as we go through this article.

What is an independent contractor?

 

Have you employed the services of someone, but you can only control the result of his/her work?

If your answer is yes, then you’ve probably employed the services of an independent contractor or freelancer.

Usually, full-time employees are required to follow the general guidelines of the business.

For example, they need to be in the office by 8 am and will have to render a minimum of 8 hours per day.

You cannot expect the same from an independent contractor or freelancer.

Independent contractors can set their own hours, and don’t always have to be in the office.

They can come and go from your office at their own leisure (provided they’re within reasonable office hours).

Independent contracts typically have freedom in how they do their job.

As long as the results of their work meet what is stated on the contract, they are free on how they do it. Independent contractors can set their hours.

They can also use their own tools in fulfilling the job.

They also have the freedom to choose which jobs to accept or refuse.

Another distinction between full-time employees and independent contractors is the requirement for employee benefits.

State and federal regulations require employers to provide their employees with certain employee benefits.

But for independent contractors, the business does not have to provide employee benefits as they are not employees.

When you pay the salaries and wages of your employees, you deduct a portion of their pay for withholding tax and payroll tax (and other deductions).

However, when you pay an independent contractor, you pay the full amount of the invoice.

You don’t have to withhold taxes for income tax and/or payroll tax.

The independent contractor is responsible for paying his/her own taxes.

Form W-9: What is it?

Now that we know what an independent contractor is, let’s proceed with the tax forms that you need to be mindful of when dealing with one.

Let’s start first with Form W-9.

Its full name is Form W-9: Request for Taxpayer Identification Number and Certification.

Source: Form W-9

IRS Form W-9 contains relevant information about an independent contractor or freelancer.

It contains the independent contractor’s:

• Legal name
• Address
• Taxpayer Identification Number (TIN) or Social Security Number (SSN)
• Business name or disregarded entity name if s/he is doing business under a different name

It is advised that you ask for an independent contractor’s W-9 as soon as you contract his/her services.

This eliminates the chance of you forgetting to secure his/her W-9 before the due date of filing the 1099-NEC form.

Alternatively, it could be the case that the independent contractor voluntarily provides his or her W-9 to each client that employs his or her services.

Just a friendly tip for independent contractors: you can prepare an unsigned template of your W-9 form.

That way, whenever you have a new client, you only have to sign one of your prepared templates then give it to them.

Whatever the case, the information you’ll find on a W-9 will be used when filling out a 1099-NEC form.  

That said, you technically don’t need an independent contractor’s W-9 to issue a 1099-NEC form.

As long as you’re certain about his/her legal name and TIN or SSN, you can fill out an independent contractor’s 1099-NEC.

What makes W-9 attractive is that it’s a legal document.

Filing false information on a W-9 form is illegal, so there’s a consequence for independent contractors if they misrepresent themselves.

This protects employers from penalties for using false information on forms filed with the IRS.

Who’s responsible for filling out a Form W-9?

It is the independent contractor’s responsibility to complete a Form W-9.

S/he must make sure that whatever information contained in it is true as filing false information on a Form W-9 is illegal.

S/he then provides a copy of the W-9 Form to his or her client.

The IRS does not require independent contractors to file a copy of the W-9 form with them.

Also, there’s no deadline for submitting a Form W-9.

However, clients/payors are required to submit a copy of the 1099-NEC form to the IRS on or before January 31 of the next year.

It is then recommended that the client secures a copy of the independent contractor’s W-9 on or before the due date of the 1099-NEC form.

What if you can’t secure a W-9 from your independent contractor?

You technically don’t need an independent contractor’s W-9 for the filing of 1099-NEC forms.

You only need to secure the following:

• Legal name of the independent contractor
• TIN or SSN

If you can reasonably gather the above data, then you don’t need a W-9.

But you need to make sure that the information you have is accurate.

Filing false information on tax forms carries penalties.

If you can’t secure the above data, you must prove to the IRS that you exhausted all options available.

This can be done by documenting your attempts in writing.

The IRS requires at least three attempts of acquiring the information required.

If the independent contractor or freelancer still does not provide you with a W-9 or the information you require, the IRS will then require you to withhold 24% from all income payments you make to the independent contractor or freelancer.

Form 1099: what is it?

There are many variations of IRS Form 1099.

Each variation covers a certain type of income payment.  

For income payments made to independent contractors, you use Form 1099-NEC. Its full name is Form 1099-NEC: Nonemployee Compensation.

Source: Form 1099-NEC

If you made income payments to an independent contractor, you’ll have to report all of it on a 1099-NEC form.

You then file a copy with the IRS, as well as provide another copy for your independent contractor.

If the state requires it, you may need to file a copy with them too.

The independent contractor will then use his/her copy of the 1099-NEC form to supplement his/her Form 1040.

That said, just because you made an income payment to an independent contractor doesn’t mean that you have to submit a 1099-NEC form.

You only have to submit and file a 1099-NEC form if the cumulative payments made to a certain independent contractor reach at least $600 (within the year).

This applies to each client-independent contractor relationship. If you employ the services of several independent contractors, expect that you’ll have to prepare and provide a 1099-NEC form to each independent contractor.

Just to remind independent contractors: you have to report all of the income payments you received to the IRS.

This applies whether you received a 1099-NEC form from your client or not. Just because you didn’t receive a 1099-NEC form doesn’t mean that you don’t have to report the income payments you received from certain clients.

Aside from non-employee compensation, here are the other income items that can be found on a 1099-NEC form:

• cash payments made for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish; and
• payments made to an attorney for his/her services.

When is IRS Form 1099-NEC required?

As already mentioned above, you will only have to complete a 1099-NEC form if the cumulative income payments made to an independent contractor reach at least $600 (within a year).

That said, this does not apply to income payments made to a C corporation or S corporation (or an LLC registered as either).

If your independent contractor is a C corporation or S corporation, it doesn’t matter whether the cumulative income payments made reach $600.

Make sure to only file Form 1099-NEC for your independent contractors.

Do not file a 1099-NEC for your employees.

You use Form W-2 for your employees instead.

Misclassifying employees as independent contractors carry significant penalties.

Lastly, be sure to not report false information on a 1099-NEC form.

Filing false information on documents filed with the IRS carries penalties.

Who’s responsible for filing Form 1099-NEC?

It is the client/payor’s responsibility to file a copy of the 1099-NEC form with the IRS. S/he must make sure to not file false information on any 1099-NEC form.

Also, s/he is responsible for providing a copy of the 1099-NEC form to the concerned independent contractor.

If you’re a client or payor, you must note that the due date for filing a copy of the 1099-NEC with the IRS is on January 31 of the following year.

If January 31 does not fall on a business day, then the due date will be moved to the next business day.

The same due date applies for the submission of a copy to your independent contractor.

For late submissions, here are the penalty rates:

• If the 1099-NEC form was submitted within 30 days after the due date, the penalty for late submission is $50
• For late submissions made more than 30 days but before August 1, the penalty for late submission is $110
• For late submissions made on or after August 1, the penalty for late submission is $280

Additionally, the penalty for intentional disregard of the filing of 1099-NEC with the IRS is $560.

Do note that these penalty rates are on a per 1099-NEC form basis.

Make sure to file 1099-NEC forms on time to avoid penalties.

If you are unable to file a copy with the IRS on time (due to various reasons), you can request an extension by submitting Form 8809 to the IRS.

Take note that this extension only applies to copies that you file with the IRS.

You still have to provide your independent contractor with his/her copy of the 1099-NEC form on or before January 31 of the following year.

Form W-9 vs Form 1099-NEC

Both Form W-9 and Form 1099-NEC are tax forms that you use when you’re dealing with an independent contractor.

Each form serves a different purpose. Form W-9 serves to inform the client/employer/payor about the independent contractor’s name, address, and TIN or SSN.

The information found on a W-9 form will then be used for the filing of a 1099-NEC form.

On the other hand, a 1099-NEC form contains information about all the income payments made by a client to an independent contractor.

It’s just one of the many variations of the 1099 form.

The independent contractor can then use the 1099-NEC form to supplement his/her tax return (IRS Form 1040).

The independent contractor is the one responsible for completing a W-9 form.

S/he must make sure to not file any false information in it as doing so is illegal.

When the independent contractor completes a W-9 form, s/he provides a signed copy to his/her clients.

On the other hand, it is the client/employer/payor’s responsibility to file a copy of the 1099-NEC Form.

S/he is also responsible for providing a copy to the independent contractor.

If the state requires a copy, then the client is also responsible for providing them with a copy.

There is no due date for the submission of Form W-9.

The IRS also does not require a copy to be submitted to them.

In contrast, the filing of 1099-NEC has a due date. It’s due January 31 of the following year.

There are penalties for late submission of 1099-NEC forms (and a larger penalty for intentional disregard of filing).

At the end of the day, both of these forms will be needed when you work with independent contractors.

Be sure to secure a copy of the independent contractor’s W-9 before the due of 1099-NEC forms.