W-9 vs 1099 What’s the Difference?
Whether hiring employees or contractors, compliance should remain top of mind. Papaya Global’s team of experts help hundreds of companies around the world ensure compliance at the highest levels, no matter the worker’s classification.
Rivka Abramson| Sep 24, 2023
- The global payroll market, currently estimated at USD 98.5 billion, is projected to reach USD 133.69 billion by 2028.
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- The proliferation of AI-powered solutions is another area of growth, as businesses seek innovative ways to optimize their payroll and payments processes.
If your finance team works with contractors, you know they’re responsible for submitting or filing various forms to ensure the business’s operations remain above board and comply with IRS tax regulations.
Two of the most important documents for your business when working with contractors are the W-9 and 1099 tax forms.
To correctly file the forms, businesses need to know the ins and outs of each form, more specifically, how they compare to the other and what they’re used for.
W-9 vs 1099 What’s the difference?
Filing tax forms is an important part of any financially healthy business. As there are 31.9 million independent contractors in the U.S. as of 2022, it’s increasingly common that businesses will not only need to fill out or collect the W-9 and/or the 1099, but thoroughly understand what they are and their purpose.
What is the W-9?
The W-9 is a tax form U.S. businesses use to get information from independent contractors, freelancers, or vendors who are US citizens or US tax residents, no matter their physical location. The form reports contractor’s name, address, and taxpayer identification number, which allows the employer to correctly report the worker’s payments and taxes to the IRS. The actual form isn’t submitted to the IRS, but it’s a crucial step in helping the business comply with U.S. labor laws.
The 1099 is also an important form for independent contractors, but it has a different purpose than the W-9.
What is the 1099?
Unlike the W-2—which employers report employees’ wages—The 1099 reports the business’s payments to non-employees (independent contractors or freelancers) during a specific year. This form serves as a record for employers to show how much they paid the contractor. Usually, anyone who earned $600 or more from non-employment income will receive a 1099.
On the surface, the two forms may not seem that distinct from one another. Comparing the W-9 vs the 1099 forms on a deeper level reveals their distinctions from one another.
Key Differences between the forms
Breaking down the W-9 vs 1099 tax forms into three categories (purpose, who fills it out, and information collected) can help finance and HR teams understand the difference between the two and when to use them.
Purpose: A W-9 form collects important tax information from independent contractors, freelancers, or vendors.
A 1099 form reports all the different types of income an independent contractor earns and submits it to the IRS.
It’s important to note that there are several types of 1099 forms. Any company that sells goods or receives payments from clients may want to review the differences between two common 1099 forms, 1099 MISC and 1099-NEC.
Businesses use the 1099 MISC report miscellaneous compensation (rent, prizes, awards, and more) to the IRS. Another common 1099 form is Form 1099-NEC. Businesses file the 1099-NEC to the IRS to report payments made to individuals or service providers who are not their employees.
Who fills it out: Independent contractors fill out the W-9 form and give it to the company that uses their services.
Conversely, the employer fills out the 1099 form to document what the contractor earned from them. Employers fill out the 1099 after the freelancer fulfills their end of the independent contractor agreement.
Information collected: A W-9 form collects the independent contractor’s information such as their taxpayer identification number (TIN) or Social Security number, entity structure, name, and address.
The 1099 form reports an independent contractor’s total income from the individual or company that hired and paid them.
One note on the W-9 form: Businesses will use the W-9 for U.S. citizens, but they’ll need form W-8 if the contractor is a non-US tax resident. Employers hiring contractors from overseas will benefit from understanding when to fill out the W-9 vs W-8.
Part of remaining compliant with the IRS guidelines is not only knowing how to fill out the forms, but understanding who receives them.
Who gets the W-9 and 1099 Forms?
Though both forms require the independent contractor’s information, the W-9 is the contractor’s responsibility. Once the contractor fills out the form, they’ll submit it to their client (the business paying them for their services), and the business will use it to report tax payments.
Businesses fill out the 1099-MISC or 1099-NEC and file it to the IRS after they receive the W-9 from the contractor.
Without the W-9, finance and HR teams can’t submit independent contractor compensation to the IRS, so it’s the business’s responsibility to collect the W-9 from the contractor.
It’s also up to the business to correctly classify employees from non-employees.
The difference between a contractor and an employee
An easy way to correctly classify workers is to remember that independent contractors aren’t employees. Employers do not need to pay into Medicare, Social Security, or other benefits for independent contractors, but they have a lot less control over several aspects when working with contractors, including:
- Control and Direction: employers typically control the instruction and direction of the employee’s work. In contrast, independent contractors have autonomy of how and where they complete their work, even if the client specifies the desired end result.
- Duration of Relationship: Employment with a full-time employee is typically ongoing, while companies usually hire independent contractors for a specific project or for a defined period.
- Payment Structure: Employees receive a steady paycheck, often with benefits such as health insurance, retirement contributions, and paid leave. Independent contractors, on the other hand, are typically paid upon project completion or for a specific service.
- Equipment and Expenses: Independent contractors often use their own tools and equipment. They’re also responsible for handling their business expenses. In contrast, employers provide tools, training, and equipment for full-time employees.
Understanding the differences between independent contractors and employees will prevent the business from having to pay heavy fines, incur penalties, and/or face reputational damage.
What are the penalties for not submitting W-9 and 1099 forms?
Failing to complete the W-9 will cost contractors. If they submit the form to the business 30 days late, contractors will need to pay a penalty of $50 and that figure goes up steadily to $580+ if the IRS believes the contractor intentionally disregarded to file the form.
If the contractor fails to provide the business with their TIN, they’ll pay $50. Additionally, for any false information submitted for the W-9, contractors will need to pay $500. Lastly, if contractors purposely falsify certifications or affirmations, they’ll need to pay additional fines or face imprisonment.
If a business fails to issue a 1099 form by the deadline, they’ll pay anywhere from $50 to $290 per form, depending on the amount of time that’s lapsed since the business issues the form. According to the IRS deadlines, if a business intentionally does not provide a correct statement, it’s fined a minimum penalty of $580 per form or 10% of the income reported on the form with no maximum.
With such heavy fees, many businesses make sure they have the correct information ahead of the deadlines, though on occasion, they’ll need a plan B.
What happens when a TIN is unavailable for a 1099 Form?
If the contractor won’t provide their client (the company they’re providing services for) their TIN, the company can use the contractor’s social security number to process the 1099. If the business cannot obtain a TIN or SSN, they should document all attempts in writing.
To avoid penalties, the IRS requires businesses to show they made at least three attempts to get the contractor’s TIN. If after three tries the company doesn’t obtain the TIN, the IRS requires them to withhold 24% from all payments to the contractor or freelancer.
Beyond collecting all of the necessary information, organizations will also want to take precautions to correctly fill out each form.
Filling Out W-9 and 1099 Forms
Individuals can easily fill out form W-9 as long as they follow all of the steps below:
- Fill out name and business name
- Check the box for the relevant federal tax classification
- List exemptions (in most cases, this is left blank)
- List the addresses used on income tax returns
- Fill out tax identification number (or SSN if missing TIN), and sign and date the form
To fill out a 1099 form, businesses need to:
- Add the total amount of money the contractor earned during the tax year (non-employee compensation)
- Fill in the payer’s TIN
- Add the company’s name and address
- Include recipient’s name and TIN (this will be two separate boxes)
- Add the recipient’s name and address
- If applicable, include any federal or state tax withholdings
When filling out the forms, it’s good to keep in mind that the deadlines for each form aren’t necessarily the same.
What are the tax deadlines?
The deadline to file 1099-NEC is January 31st, while the 1099-MISC deadline is March 1 or March 31st if filing electronically.
As the IRS does not collect Form W-9, it doesn’t have a deadline. However, because employers must file 1099 by the earliest Jan. 31st, independent contractors should file the form with their client as soon as possible. Businesses can also request the W-9 from contractors between the end of the year and the 1099 filing deadline.
Filing tax forms with ease
Whether hiring employees or contractors, compliance should remain top of mind. Papaya Global’s team of experts help hundreds of companies around the world ensure compliance at the highest levels, no matter the worker’s classification. Whether it’s local employment laws, payroll regulations, or calculations, Papaya’s technology ensures local compliance every time, even screening payroll data before payroll to prevent errors.
Grow your business with peace of mind by booking a demo.
Do you need a W-9 for a 1099 tax form?
The contractor needs to fill out the W-9 with their information (including their name, address, and taxpayer identification number) and submit it to their client. The client will then fill out 1099 forms and report tax payments. Though businesses will not need to submit the W-9 to the IRS, they’ll need all of the information to fill out the contractor’s 1099.
Who does not need to fill a W-9?
The W-9 is for non-employees (freelancers or contractors) to report their information to their employer. Employees and foreign contractors do not need to fill out a W-9. If the contractor is a non-U.S. citizen, they’ll need to fill out a W-8.
How can an independent contractor be distinguished from a full-time employee?
Employers can distinguish contractors from employees by identifying their working relationship. If the employer has control over the worker’s schedule, working parameters (how and where they work), as well as the end result, they’re employees. Workers are also likely classified as employees if their contract is for an indefinite period of time and includes benefits such as Social Security and Medicare. Conversely, if the business can only dictate the outcome of the work, doesn’t pay into Social Security or Medicare, and hires the worker for a specific time period or per project, the worker is a contractor.
Does a 1099 require a W-2?
The 1099 forms and W-2 forms have different functions. Professionals filling out 1099 forms do not need a W-2. Employers will need to fill out a W-2 and give a copy to all individuals classified as employees.