W9s and 1099s…What Does It All Mean?

It’s tax time and if you run a small business (or are a freelancer), chances are you have paid contractors and/or have been a paid contractor.  Now is the time to make sure you have your W9s and 1099s in order!

What is a W9 and Why Is It Important?

A W-9 is a tax document that serves as a request form for information on the individual receiving payments. W-9s typically request basic information such as a payee’s full name, address, and tax ID (or social security number), which is then used on the 1099 come tax time. It is important that contractors complete W-9s at the start of their services, so that when it is time to issue 1099s, the contractor does not have to be tracked down.

Issuing W-9s at the start of an agreement with a freelancer/contractor is also important to maintaining accurate financial records for your business.  If a contractor is paid $600 or more within a tax year–they must be issued a 1099, and therefore must have a W-9 on file.  Waiting until the time to issue the 1099-Misc to obtain the contractor’s W9 can be difficult especially if you stopped working with that person early in the tax year. Their contact information may have changed, or they may not want to give you their information.

It is a best practice to collect W-9s from all contractors before work is performed and payments are made for two reasons:

  1. By completing and signing the W9, the contractor is certifying that they are not subject to backup withholdings – meaning they do not owe back-taxes and you, as the payer, are not responsible for withholding taxes from the contractor and remitting to the IRS. If the contractor IS subject to backup withholdings, you as the payer, are responsible for withholding taxes and paying the IRS on behalf of the contractor.
  2. By completing the W9, the contractor is providing you with their contact information and tax ID so that you can issue them a 1099-Misc for tax purposes. You are required to issue a 1099-Misc if you pay a contractor more than $600 during the tax year. Even you if you do not initially expect to pay the contractor that much, you should still obtain a W9 before work begins because things may change and you end up crossing that $600 threshold by the end of the year.

What is a 1099 and Why Do I Need One?

A 1099 is another tax document that is issued from a business to a contractor/freelancer.  A 1099 is to a contractor what a W-2 is to an employee.  One copy is issued to the contractor and one copy is issued to the IRS. Since contractors / freelancers do not pay taxes on earnings throughout the year, issuing a 1099 is important because it ensures that the correct amount of income and taxes are being reported by the contractor.

Who needs a 1099?

It is not always obvious who requires a 1099. Generally, it is best to issue a 1099 to anyone who is not an employee that has received $600 or more for goods or services that pertain to your business. This is inclusive of individuals and certain business entities.

It is also important that you are mindful of distinguishing between an employee and a contractor, not doing so can be a costly mistake!  If you misclassify a contractor as an employee, you can end up paying excess payroll taxes and fees. If you misclassify an employee as a contractor and find yourself dealing with the IRS, which can also lead to excessive penalties.

Filing 1099s can get complicated, and sometimes a business owner will forgo filing such documents altogether.  This is not a good practice and should be avoided.  Hiring an accountant you trust to handle your 1099s is a good way to avoid getting bogged down in the weeds during tax season. At Desnoyers CPA, we are experienced with 1099s and we work with business owners to handle those accounting matters. That way you can focus on running your business!

Written by Desnoyers CPA

Desnoyers CPA

Known for her friendly, outgoing nature and her rare talent for financial foresight, Lydia Desnoyers has been serving individuals and small businesses in Florida since 2010. After earning her Master’s Degree in Accounting from Nova Southeastern University and her Bachelor’s Degree in Accounting from Florida State University, she became a Certified Public Accountant and a Certified Fraud Examiner.

Share this on...Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Email this to someone