If you're a small business owner in the United States and have part-time folks (aka, independent contractors, aka freelancers) working or providing services to your business, the cusp of tax season is a good time to make sure your W-9s and 1099s are in order. What are those clandestine alphanumeric codes? They're tax forms of course!
What is a W-9?
A W-9 is a form that an independent contractor completes and returns to the business they are providing services to. It documents their taxpayer information. Why is this necessary? Well, when a business pays an independent contractor more than $600 in a tax year, a W-9 helps the business document the relationship. But more importantly, the business uses the W-9 (and the amount paid to the given independent contractor) to issue a 1099 to the contractor. (We'll get into what a 1099 is in a bit.)
Oftentimes, business owners make a made scramble right around now to make sure all of their contractors have completed the W-9. A simple way to alleviate this hassle is to issue a W-9 to contractors they moment you hire them and then file it away. At the same time, create the contractor's account in your accounting system so that you are able to track payments made to them from day one.
But what if you don't anticipate paying a given contractor more than $600 in a tax year? Ultimately, they don't have to report that income, but it does you no harm to collect a W-9 from them. What if they end up doing good work for you and the engagement extends? Then you'll already have their W-9. Worst case, you shred it.
It's worth noting that as a business owner, you do not send the W-9 to the IRS. You keep it in your records.
What is a 1099?
Officially known as the 1099-MISC, a 1099 is what a business issues its independent contractors, documenting the amount paid for the tax year. The 1099 must be issued by the business to the independent contractor by January 31 (31 days after the end of the the tax year). This is how the independent contractor calculates (and pays) tax owed. Because think about it: if they're not a waged worker (aka, an employee), no tax is being withheld.
Since issuing 1099s can be time consuming, many small business owners turn the task over to their accountant.
Who is a 1099?
Good question! Some 1099s are fairly obvious. Say you hire an assistant. Or say you contract work out to a provider who can do it faster or cheaper than you. Maybe you hired a cleaning service or a consultant or an advertising firm. Even if you pay your bookkeeper or accountant more than $600 in a tax year, they're considered 1099s to you! The IRS defines an independent contractor as such: "The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done." You basically want to ask yourself whether or not your business paid a given person/company more than $600 this year. If the answer's yes, you likely need to issue a 1099.
As always, nothing in this or any Kashoo post should be considered legal, tax or financial advice!