A Quick Guide to Contractor Tax Forms
Contractor taxes work slightly differently than employee taxes. One of the main differences is the forms used.
Contractors receive both W9s and 1099s in order to do their taxes. Both are known as information returns, meaning they provide the contractor information about their taxable income.
But what’s the difference between these two?
In this article, we’ll provide you a quick guide to these contractor tax forms. But first, let’s differentiate contractors from employees.
Contractor vs. Employee
Contractor and employee are both worker classifications for the IRS’s purposes. Both may perform the same type of work, but different tax laws and other regulations may apply to their income.
The main distinction between the two types of classifications is that employees are generally under contract to work defined hours, whereas contractors hand you fixed deliverables. Employees also get benefits in many cases, whereas most contractors do not.
Additionally, employers withhold taxes for employees and pay a portion of payroll taxes like Social Security and Medicare. Contractors are responsible for both the employer and employee (assuming they’re self-employed) portions of Social Security and Medicare taxes. They also have to pay their own income taxes, but they can generally deduct various expenses on their tax returns.
Speaking of tax returns, both types of workers file a Form 1040 when completing their tax returns.
However, they use different tax forms for employment purposes. Employees fill out a Form W4 when hired and get a Form W2 for their tax returns. Meanwhile, contractors fill out a Form W9 and receive Form 1099s for taxes.
Some Quick Contractor Tax Form Terminology
The IRS identifies taxable entities — be they businesses or individuals — using their Taxpayer Identification Number (TIN).
Contractors that have done any of the following will need to obtain an Employer Identification Number (EIN) from the IRS:
- Create a formal legal structure
- Hire employees
- Open a Keogh or Solo 401(k) plan
- Buy/inherit an existing business operated as a sole proprietorship
- File for bankruptcy
Contractors that haven’t done any of these things can use their Social Security number (SSN) as their TIN.
You’ll see each of these terms (SSN, EIN, TIN) on contractor tax forms, so make sure you know what they mean.
What is a Form W9?
Form W9 — formally known as Request for Taxpayer Information and Certification — is akin to an employee’s Form W4. On the W9, contractors provide their name, business name (if different from their own name), tax classification (such as LLC or C-corporation), address, TIN, and some other basic information.
The contractor then signs the form declaring they have truthfully filled out the form and that they are authorized to work in the US.
Who Fills Out a Form W9?
Any non-employee individual that predicts they will earn at least $600 from a single client must fill out and provide a W9 to that client. Businesses that work for said client do not need to fill out a W9.
Should the contractor not provide a W9, the client is required to withhold 28% of the funds they pay the contractor to cover taxes.
As a best practice, firms should ask clients to fill out a W9 the moment they hire them. This will minimize any later headaches when tax season comes.
What is a Form 1099?
There are various Form 1099s, each for a different type of income. For example, a 1099-DIV is for dividend income.
However, contractors receive a 1099-MISC — formally called Miscellaneous Income — from each client. This is kind of like the contractor version of the employee’s Form W2. The contractor must then use the 1099-MISC to complete the appropriate forms on their tax return.
As the client, there are several boxes listing different kinds of miscellaneous income on the form. You must make sure to fill in the correct boxes with the contractor’s earnings.
Additionally, there are several boxes for each party’s name, address, TIN, and city/state/country/zip code.
Who Fills Out a Form 1099?
Businesses must fill out a 1099 for every contractor that they pay $600 or more for services over the course of one tax year. You must send it to the contractor (not have it arrive, but submit it) by January 31 of the year following the tax year in question.
The Bottom Line
Forms W9 and 1099 are but two of several tax matters contractors and clients must take care of. It often makes sense to work with an accountant and invest in accounting software to keep a handle on things and make tax time that much easier.
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