Form W-9 Vs. 1099: What’s The Difference?

As a business owner or independent contractor, you’ll need to know how to properly file tax information with the IRS each year.

Tax forms W-9 and 1099 both relate to independent contracting work, but most people don’t fully understand their differences.

In this article, we’ll explain exactly what the two forms are and how they differ. We’ll also discuss when you should and shouldn’t complete them, as well as walk you through the process.

What Is a Form W-9?

An IRS Form W-9, also known as a Request for Taxpayer Identification Number, is used by businesses to obtain tax information from individuals they hire as freelancers and independent contractors.

The IRS requires such information whenever a business pays a freelancer more than $600 within a tax year.

Businesses file this information through Form 1099 using the information gleaned from the W-9.

The W-9 is exclusively used to record contractor tax information, and neither the contractor nor business should send a copy to the IRS.

Businesses should fill out W-9 with the following information:

• Business name

• Business entity (e.g., partnership, s corporation, trust/estate, etc.)

• Business’ tax ID

Contractors should fill out the W-9 with information such as:

• Full name

• Address

• Social security number

• Tax ID

• Backup withholding status

What Is a Form 1099?

Form 1099 is a tax form that businesses need to send to the IRS each year to report income paid to non-employees.

It’s essentially just the independent contractor version of the W-2, the tax form that employers send to their full-time employees to detail their tax deductions and total annual income.

One major difference, however, is that form 1099 does not include tax deductions like the W-2 does.

This is because independent contractors are expected to pay all of their taxes directly to the IRS rather than have them simply withheld from their income, as is the case for conventional full-time employees.

Businesses and contractors originally needed to file using the 1099-MISC prior to 2020 but now file using a 1099-NEC (non-employee compensation) instead.

What’s the Difference Between a W-9 and 1099?

1099 is the tax form that businesses send to their independent contractors and the IRS each year.

The W-9 is simply the form that businesses send to contractors to obtain that information in the first place. Its sole purpose is to serve as reference material and should not be submitted to the IRS.

Why Do Contract Workers Need to Fill out a Different Tax Form From Employees?

The IRS sends out different tax forms for permanent employees and contractors because of the different tax laws associated with each type of worker.

Unlike normal employees, businesses aren’t required to pay or withhold taxes when doing payroll for freelancers.

Freelancers are therefore responsible for keeping track of their own income and filing federal and state income taxes on their own.

The W-9 accounts for this difference by excluding tax deductions as an item.

What Is the Difference Between Form 1099-MISC and Form 1099-NEC?

Business owners must file a 1099-NEC with the IRS each year to report payments made to freelancers and independent contractors.

When people talk about Form 1099, they’re typically referring to 1099-NEC.

The 1099-MISC is instead used to report payments made to individuals who were neither employees nor independent contractors.

The 1099-MISC originally include independent contractors but was amended to exclude them from the 2020 tax year.

Common types of payments filed using Form 1099-MISC include:

1. Rent

2. Health care payments

3. Awards and prizes

4. Section 409A deferrals

5. Attorney payments

6. Nonqualified deferred compensation

The IRS requires businesses to file a Form 1099-MISC when any such payments exceed over $600 or $10 in royalties over the course of the year.

How to Fill Out Form W-9

If you’re a business owner, you’re responsible for making sure that each of your contracted workers receives a complete W-9 before they start working.

If you’re a contractor, then you’ll need to complete the W-9 and return it to the business owner when you’re finished.

Here are some simple steps to help you fill out the form:

1. If you’re the business owner, provide the name of your business in section two and your full legal name in section one. If you’re a contractor, then simply provide your name and leave the second section blank.

2. Check the box under section three that best describes your business. Some form W-9’s don’t include an “individual or sole proprietor” option, so make sure you have the right version if that applies to you.

3. Provide your address and other personal information on lines four and five.

4. Complete your employee identification number (EIN) and social security number (SSN).

5. Finalize the W-9 with your signature and the current date.

If you’re the business owner, then make sure to make multiple copies of the W-9, as you’ll need it during tax season to fill out Form 1099, as well as possibly Form 1096.

How to Fill Out Form 1099

You need to gather your independent contractors’ federal tax ID numbers before you begin filling out Form 1099.

This includes your payee’s social security number or Taxpayer Identification Number (TIN), obtained from their submitted W-9.

This also includes your business’ tax ID number, which could either be an EIN or social security number. If you don’t have one yet, then you’ll need to apply at the IRS website.

Once you have this information on hand, you can follow these steps to complete Form 1099:

1. Fill out the very top left section with your personal details. This includes basic information such as full legal name and contact number.

2. Locate “Payer’s TIN” and “Recipient’s TIN” left of sections five and six. These are respectively the business’ taxpayer ID number and the contractor’s social security number.

3. As a business owner, fill out the section right under “Recipient’s TIN” with the independent contractor’s personal information. You should be able to find all this information on their W-9.

4. As a business owner, locate section seven and provide the total sum you paid out to the contractor during the year.

   If you’re an independent contractor, then make sure the client filled out section seven. If not, then fill out how much money you received.

5. Most businesses don’t withhold earnings from their contractors. If you did, however, then the final step is to fill out boxes four and eleven with the amount you withheld for federal or state income taxes.

If you’re a business owner that works with many contractors, then you should consider looking into corporate tax software solutions to help you automate the above process.

When You Should Avoid Filling Out Form W-9

There are a number of scams and other pitfalls associated with W-9s that you should be aware of.

Here are a few common situations:

• Scams. You may receive a W-9 from a bank or other financial institution that needs to report interest or dividends.

  However, banks should typically already have your tax information on hand, so make sure that the interested party is actually the bank and not an imposter before providing sensitive information.

• Wrong classification. Don’t fill out a W-9 if you’re a full-time employee, as the form is meant exclusively for independent contractors.

  Employees sometimes receive W-9’s due to innocent mistakes.

  Other times, however, unscrupulous employers will try to classify their employees as independent contractors in order to save money.

  If you fill out the W-9, then the IRS will expect you to pay the employer’s share of Medicare and social security taxes, as well as calculate the taxes that you owe.

  Always stay wary and take steps to protect yourself. Suppose you were under the impression that you were an employee and your employer refers to you as an independent contractor. In that case, that’s a red flag that you should instantly investigate.

  The exception is if you and your employer engaged in an explicit conversation to change your employment status.

  This sometimes happens when the nature of an employee’s duties drastically changes. For example, an employee may start out working full-time at the office but may transition to a work-from-home, flexible schedule.

How to File a Form 1099 With the IRS

Employers should purchase their 1099s either from a reputable accounting software company or from the IRS directly.

You should typically make five copies of each independent contractor 1099.

You’ll file one to the federal government and one to the state. Two copies should be sent to the contractor, and the last should go in your files for future reference.

You can file the form through online accounting software or by mail, but either way, the IRS and the recipient need to receive their copy by February 1st each year.

As a business owner, you’ll also need to file a Form 1096 with the IRS to summarize any 1099s you submitted for your independent contractors.

Author

Chris Kolmar

Chris Kolmar is a co-founder of Zippia and the editor-in-chief of the Zippia career advice blog. He has hired over 50 people in his career, been hired five times, and wants to help you land your next job. His research has been featured on the New York Times, Thrillist, VOX, The Atlantic, and a host of local news. More recently, he's been quoted on USA Today, BusinessInsider, and CNBC.