Q&A - Let’s talk about the W9 and 1099
If you are new to the entrepreneurial and small business world, W9’s and 1099’s may catch you off guard come January. But what are they? And why does it matter if you send or receive them? Let’s break it down so you can handle it like a pro or hire a pro if you are not in the DIY mood this tax season.
You can use this chart to check if you should be filing a 1099-NEC, and then we will get into the details below.
All about 1099’s
What is a 1099?
A 1099 is an IRS form that reports income that would not appear on a W2 such as non-employee compensation, interest, rent, royalties and much more! There are many types of 1099’s issued for tax purposes, check out this article if you are interested in a full run down. For most small businesses; however, 1099-NEC is the main focus.
What is the 1099-NEC specifically?
The 1099-NEC records payments that a business made to independent contractors and freelancers during the year. Think of it as the W2 for the self-employed.
What about a 1099-MISC?
If you have been in business for bit, you may remember filing a 1099-MISC. The 1099-MISC still exists for revenue such as rents and royalties, but the 1099-NEC is now used for non-employee compensation as of 2020. If you happen to receive a 1099-MISC in future tax years, it’s okay! There is a transition period as people get use to filing 1099-NEC’s; it will be handled by your tax preparer.
Do I have to issue a 1099-NEC to everyone my business pays?
Thankfully, no! You only need to issue 1099’s to individuals or businesses that are taxed as a sole proprietor, limited liability partnership (LLP) or partnership. Essentially if their profits are taxed as an individual, a 1099 needs to be issued. So, the annual fees you pay to GoDaddy or Google for your domain, do not merit a 1099 because both those companies are corporations. However; if you hire a subcontractor for graphic design that is taxed as a sole proprietor, you would need to issue a 1099 for the payments made to them.
What about LLC’s?
LLC’s are tricky! First, an LLC is a legal classification, not a tax classification. So knowing one of you subcontractors is an LLC is not enough information, you must understand how they elect to be taxed. They will be taxed in one one of the following ways:
1. An LLC taxed as an individual – Just think of this as a sole proprietor; any payment to them would require a 1099.
2. An LLC taxed as a partnership– Just think of this as a sole proprietor; any payment to them would require a 1099.
OR
3. An LLC taxed as an S-Corp - Just think of this as a corporation; there is no need to issue any 1099’s.
4. An LLC taxed as a C-Corp - Just think of this as a corporation; there is no need to issue any 1099’s.
So, do I just ask my contractors what their business is taxed as?
Yup! It may feel weird the first time, but it is a very normal part of the business world. If they are doing freelance or contract work for your business, they are likely doing it for others as well and may already have a W9 ready to provide you. If they are taxed as a corporation, you can still have them fill out the W9 for your records, but you will not and should not issue a 1099 to them.
When do 1099’s need to be issued by?
January 31st (or the following Monday if that falls on a weekend)
What is the minimum payment requiring a 1099?
If you paid $600 or more in aggregate throughout the tax year you must issue a 1099.
How do I issue 1099’s?
You can do so by mail if you wish, but I would highly recommend doing so electronically, check out Track 1099. It can integrate the contact directly from Xero or QuickBooks, or you can simply type the information in manually from the W9 you received. They charge $2.99 per form up to 10 forms and then get cheaper if you need to file additional 1099’s. If you can provide a recipient email, delivery is free; if you need to mail the form, it is an additional $1.68 for postage. [Prices as of October 2021]
All about W9’s
Okay, this is a lot to remember! What about this W9?
Don’t worry, W9’s are the easy part! A W9 is just simply a request for a taxpayer’s information. The IRS provides this form for you to properly collect the information you will need to issue the 1099. Not all IRS documents can be e-signed, but a W9 can be! You will not actually file this form with the IRS, but it should be filled out, signed, and kept for your records. You can have your contractors print and sign, or use an electronic method such as HelloSign or DocuSign. They will be required to fill out the following information:
How do you fill out a W9 form?
Informational Section
Box 1
Name shown on tax return (could be business name or personal name depending on filing status)
Box 2
Business name if different than Box 1
Box 3
Tax filing status
Box 4
Exemptions codes (these are unlikely)
Box 5-7
Business address
Part I – Tax ID
This will be business EIN if they have one, or the business owner’s SSN if they do not. I highly encourage all businesses to obtain an EIN to avoid having to use their SSN. Watch my TikTok here on how to obtain your own if you have not yet.
Part II – Certification
The individual / business is certifying (under penalties of perjury) to all the conditions listed at the bottom of page 1 of the form.
What if the individual or business is foreign?
Anyone filling out a W9 is certifying they are not a foreign entity or person. If the subcontractor or freelancer is foreign they will not need to fill out a W9 and you will not issue a 1099. Instead, you will have them fill out W8-BEN. You will not actually file this with the IRS (just like you will not actually file a W9). But it should be filled out, signed, and kept for your records.
How can I make this process easier?
Do I need to do all of this in January?
No! I highly recommend you ask for a W9 to be filled out anytime you begin working with a subcontractor. As we return from the holidays, January always proves to be a busy time with longer than normal response rates. Requiring W9’s as part of your process to work with all contractors, will help expedite the process in January as you will not be waiting on others to provide information in order for you to file.
Is it possible to pay contractors and not have to deal with filing 1099’s?
Yes! You can pay your contractors via a payroll provider and generally those systems will issue 1099’s for you. Common payroll providers such as Square Payroll and Gusto both issue 1099’s to contractors if you paid them via the payroll system. There are usually fees involved with paying contractors this way, but those fees may be worth it if you want to avoid the worry of issuing 1099s.
What if I am a subcontractor that will be asked to fill out a W9?
Have all your information filled out already besides the signature and date. Use either Adobe to electronically sign and date when requested, or you can print and scan back.
(Hint: if you don’t have a scanning app, on your iPhone go to Notes —> click the picture icon —> click scan, it will provided a scanned version of the document you can save or email that looks SO much better than just taking a photo).
Lastly, it is very important for both your own businesses taxes AND for your contractor’s taxes that you issue 1099’s and do so in a timely manner. Not doing so could lead to audits for either party; and I have to believe you have far better things to do (like running your business) than dealing with an annoying tax audit.
Would you just rather not issue 1099’s? Reach out to me here and I’ll handle it for you!