Understanding W9s and 1099s

W9s and 1099s are two of the most important tax forms for tracking payments to independent contractors, yet they are often misunderstood. To help, here’s a primer on what entrepreneurs and freelancers should know.

Background

In the expanding freelance economy in Boulder and Kansas City, more individuals are classified as independent contractors rather than traditional employees. When a person is employed, their employer is responsible for reporting income to the IRS and the state, withholding necessary taxes, and remitting those payments on their behalf.

For independent contractors, this process differs. Clients do not withhold or remit taxes, making it the contractor’s responsibility to track earnings and ensure taxes are properly paid to the IRS and the state.

To maintain accurate income records, the IRS requires reporting forms, which is where W9s and 1099s come into play.

What’s a W9?

IRS Form W9 is an informational document that provides details about an individual or business receiving payments. This form is typically filled out by independent contractors, freelancers, and small business owners when requested by a client that will be paying them. The W9 contains essential tax information that helps the client file a 1099 at the end of the year, including:

• Name and business name (if applicable)
• Tax classification (sole proprietor, LLC, S-Corp, etc.)
• Social Security Number (SSN) or Employer Identification Number (EIN)
• Certification that the information provided is correct

The W9 is not submitted to the IRS. Instead, it is given to the client making the payments. Sometimes the contract between the client and the contractor will require the contractor to provide a W9, and sometimes the agreement will allow the client to withhold paying the contractor until the form is delivered. 

What’s a 1099?

A 1099 is a tax form businesses use to report payments made to independent contractors, freelancers, and non-employee service providers. If a company pays an independent contractor $600 or more in a calendar year, they are required to issue a Form 1099 to both the contractor and the IRS.

How the 1099 Process Works

1. The contractor provides a W9 to the business before payments are issued.
2. The business tracks payments throughout the year and, if total payments exceed $600, prepares a 1099.
3. By January 31 of the following year, the business sends a copy of the 1099 to both the contractor and the IRS.
4. The IRS uses the 1099 to ensure that the contractor properly reports and pays taxes on the income.

Many businesses use third-party services to handle 1099 filings. Personally, I use track1099.com, an online platform that simplifies the process of generating and filing 1099s electronically. It’s a great service that automates the workflow, reducing errors and making compliance easier.

What If You Don’t Receive a 1099?

Even if a client fails to issue a 1099, independent contractors are still responsible for reporting their income to the IRS. The IRS does not require contractors to attach 1099 forms to their tax return but does match reported income with issued 1099s to detect discrepancies.

Practical Tip for Contractors

It’s a good practice to complete a W9 and keep a digital copy on file for easy access when needed. That way, when a client requests one, you can quickly send it over without delay.

*This article is general in nature and is not legal advice.