W9 and 1099: Two Tax Forms Every US Entrepreneur Needs to Know About

In my last post I described the benefit of hiring contractors while bootstrapping a startup. I also explained the tax obligation that goes along with hiring contractors, which is to file a 1099-MISC form for contractors that meet certain requirements. I also mentioned severe penalties for not meeting this requirement. In this post, go into more detail about who to issue 1099-MISC forms to, how to file, and what the W9 form has to do with it.

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Who do I send a 1099-MISC to (and what does the W9 form have to do with it)? 

There’s a long list of requirements for who businesses have to send 1099-MISC forms to, and I encourage you to familiar with the rules so you know what applies to your business. This post is focused on contractors.

You must provide a 1099-MISC form to contractors if they meet the following criteria:

  • they provided a service, not a product
  • you paid them at least $600
  • their business is not classified a corporation (C-Corp, S-Corp, or LLC filing as a C- or S-Corp)
  • the corporation rule doesn’t apply to attorneys: you must provide a 1099-MISC form for all attorney fees
  • you didn’t pay with a credit or debit card

To find out whether or not the business is a corporation and to get their business address and tax ID number, you should ask the contractor for a W9 form before making your first payment. An electronic copy is fine - you don’t need paper.

The W9 is a simple form that states the business or individual name, tax classification, address, Tax ID. Most contractors should already have the form on file, and if not, they should be able to quickly produce it. Here’s a link to the form.

You don’t need to request a W9 if the business has “Inc” or “Corp” at the end of their name. That tells you they are a corporation.

If a vendor refuses to provide a W9 form, you are required to withhold 28% of your payment and remit to the IRS (or better yet, don’t hire them!). If you don’t issue a 1099-MISC (you can’t without the information from the W9), you could be responsible for that 28% on top of the full payment already made to the contractor.

How do I file a 1099-MISC form and what is the deadline? 

Like filing your tax return, there are many ways to file a 1099-MISC. You can mail in paper forms, but I recommend using your accounting software or another online service.

For example, some versions of Quickbooks Desktop and Online allow you to flag vendors as 1099 vendors and save their address and tax ID. At the end of the year it’s very easy to file with information already in the system.

Even if your accounting software doesn’t issue 1099’s, other services may integrate with your accounting software so you don’t have to enter the address and Tax ID, and amount for each vendor. Tax1099.com is a service that integrates with most accounting software.

Other services include Intuit’s standalone 1099 filing service and expressirsforms.com.

These services are very inexpensive (around $3/form) and well worth the cost.

The deadlines are as follows:

 Jan 31 (or next business day): provide the 1099-MISC form to contractors

Feb 28: paper file forms with the IRS (not required if electronically filing)

Mar 31: electronically file the forms with the IRS (recommended)

It’s after the end of the year and I didn’t request W9’s. What do I do? 

  1. Run a report in your accounting software to figure out how much you paid each vendor in the previous year.
  2. Make a list of vendors who you paid more than $600 for services and aren’t obviously a corporation.
  3. Request a W9 from each one (attach a blank form for convenience)
  4. See above for filing options
  5. Start a process now for collecting W9’s from each new contractor!

What if I haven’t filed 1099-MISC’s in the past? 

You have some risk of tax liability to the IRS. In an audit the IRS will identify vendors you paid for service. Each vendor you don’t have a W9 on file for and you didn’t send a 1099-MISC forms will have to prove they included your payment in their tax returns.

If they didn’t report your payments or can’t/won’t prove it, the IRS can bill you for 28% of what you paid to the vendor (good luck getting that amount back from the vendor).

If you haven’t filed 1099-MISC’s in the past, start now. Make collecting W9’s a standard part of your process for hiring consultants (don’t make a payment until you get one). Make the filing process easy each year.

Although this requirement is convenient, don’t get on the wrong side of the IRS by neglecting it.

Question: How do you make issuing 1099’s easy each year?