When to use W-9 and 1099 forms
Now that we've covered the basics of each form, let's look at some real-world scenarios where you'll need to put them into action.
Requesting and collecting W-9 forms
Your business will need to obtain a completed W-9 form anytime you:
- Hire a new contractor, consultant, or freelancer
- Start working with a new vendor or supplier
- Pay rent to a new landlord or property manager
- Make royalty payments of $10 or more
- Award a cash prize of $600 or more
- Make any other payment that may be reportable on a 1099 form
Ideally, you should collect the W-9 before the payee begins work or before you issue them payment. That way, you'll have their information on file when it comes time to prepare their 1099s.
Preparing and filing 1099 forms
Your 1099 filing requirements will depend on the types of payments you made throughout the year. But in general, businesses must issue 1099 forms to individuals and unincorporated entities they've paid $600 or more during the tax year for services, rent, prizes, awards, or other income not processed through credit card payments.
To prepare the 1099s, you'll need the payee's name, address, and TIN (SSN/EIN) from their W-9 form, as well as the total amount you paid them during the year. You'll then report this information on the appropriate 1099 form(s) and send copies to the payee and the IRS.
The filing deadline is typically January 31 for both paper and electronic 1099s. But it's a good idea to get a head start on the process, especially if you have a lot of forms to prepare. Many payroll and accounting software platforms have built-in 1099 filing features that can help automate the process.
6 tax considerations for W9 and 1099 forms
Collecting W-9s and filing 1099s may seem like just another administrative task. But these forms actually play a critical role in your business's tax compliance. Here are some key things to keep in mind:
Backup withholding tax
If a payee fails to provide their taxpayer identification number on a W-9 (or provides an incorrect one), you may be required to withhold 24% of their payments and remit it to the IRS. This is known as backup withholding. To avoid this, make sure you're collecting W-9s upfront and double-checking the information for accuracy. If a payee is subject to backup withholding, they'll need to contact the IRS directly to resolve the issue.
State filing requirements
In addition to the federal 1099 filings, you may also have state-level requirements to contend with. Many states require businesses to file 1099s with their tax department, often with earlier deadlines than the IRS. Make sure you understand the specific rules for each state where you do business. Failure to comply could result in fines and penalties at the state level.
Independent contractor classification
The W-9 and 1099 forms are specifically for independent contractors, not employees. It's critical as an employer to make sure you're classifying your workers correctly. Misclassifying an employee as a contractor (and vice versa) can lead to serious tax consequences, including back taxes, penalties, and even legal action. If you're unsure about a worker's status, consult with a tax professional or use the IRS's "common law rules" to make the determination.
International payees
If you're working with contractors or vendors outside the U.S., you may need to use a different form to collect their information. The W-8 series of forms (like the W-8BEN and W-8BEN-E) are used for foreign payees who are claiming a reduced rate of withholding under a tax treaty. As with the W-9, you'll collect the W-8 upfront and use it to prepare any necessary 1099s or 1042-S forms at year-end. But the rules around withholding and reporting for international payees can be complex, so it's best to consult with a tax advisor.
Self-employment tax obligations
Unlike employees, self-employed contractors are responsible for paying both the employer and employee portions of Social Security and Medicare taxes. These individuals will use the information from their 1099 forms when preparing their tax return to calculate their self-employment tax obligations. As the paying business, you're not responsible for withholding these taxes, but you must accurately report payments so contractors can fulfill their employment tax requirements.
Record retention
Finally, it's important to keep good records of all your W-9s and 1099s, even after you've filed them with the IRS. The general rule of thumb is to retain these forms for at least three years from the due date of the return or the date you filed it, whichever is later. Having a clear record retention policy will help you stay organized and prepared in the event of an audit or other inquiry from the IRS. Many businesses store these forms electronically in their accounting or payroll software for easy access.
Potential W-9 and 1099 penalties
So what happens if you don't collect a W-9 or file a 1099 when you're supposed to? The short answer is: nothing good. The IRS can impose significant penalties for non-compliance with 1099 filing requirements:
- Failure to file a correct 1099 on time: $60-$330 per form (for 2024), depending on how late the filing is
- Failure to furnish a correct 1099 to the payee: $60-$330 per form (for 2024), depending on how late
- Intentional disregard of filing requirements: $660 per form (for 2024), with no maximum penalty cap
Maximum penalty limits apply based on business size, except in cases of intentional disregard.
