Having the right independent contractor tax forms in place is essential for businesses with independent contractors—sometimes called 1099 employees. These forms exist to record the information necessary for independent contractors to file taxes correctly and on time. For employers, having accurate independent contractor tax forms allows you to accurately track and report payments to the IRS.
What IRS forms are needed for independent contractors?
The primary independent contractor tax forms are:
- Form 1099-MISC: This form is used by employers to report payments made to independent contractors or other non-employees for goods and services. Employers must submit Form 1099-MISC to the IRS and provide a copy to each independent contractor by January 31st of the following year.
- Form W-9: This form is used to collect information from independent contractors, including their name and address, tax identification number, and other pertinent financial information. Employers must submit Form W-9 to the IRS and provide a copy to each independent contractor before making payments.
- Form 1099-K: This form is used to report third-party payments made to independent contractors. Businesses must submit Form 1099-K to the IRS and provide a copy to each independent contractor by January 31st of the following year.
This guide will provide more details about independent contractor tax forms required for working with 1099 contractors. With the proper knowledge, employers can ensure that their independent contractor tax forms are accurate helping them stay compliant and avoiding costly mistakes.
The first step is make sure your worker is properly classified as an independent contractor.
What does it mean to hire an independent contractor?
Generally, an independent contractor is someone who provides services to a business or organization but is not an employee and does not receive regular wages. Although many businesses choose to use independent contractors due to the flexibility and cost-effectiveness it offers, employers must be aware of their responsibilities when it comes to paying taxes.
To determine whether an individual is an employee or an independent contractor, consider their degree of independence and control. The IRS considers the three common laws below to understand the relationship between the organization and the worker.
- Behavioral: oes the payer control what is done and how the individual does it?
- Financial: Does the payer control the business aspects of the job, such as how they will pay and whether they will reimburse expenses?
- Type of relationship: Does the individual providing the service have employee benefits? How long is the relationship expected to last?
Generally, if you as the employer can only control the result of the work and not what the individual will do and how they will do it, the individual is an independent contractor.
If you misclassify an employee as an independent contractor, you may be held liable for the individual’s employment taxes, and it may lead to penalties. If it is still unclear whether they are an employee or an independent contractor, file Form SS-8 with the IRS so they can determine the worker’s status for you.
What is Form SS-8?
If you’re uncertain about the classification of your worker, you can file Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) with the IRS. They can help you determine their status before hiring them to avoid employee misclassification, which can lead to severe penalties. Penalties for misclassification include:
- Fines of up to $1,000 per misclassified employee
- Complete payment of unpaid FICA taxes
- Payment of up to 3% of the misclassified worker’s wages
- $50 charge on every unfiled W-2 form
- Imprisonment of up to a year
Although it is not a mandatory document, requesting a worker’s status via Form SS-8 can help you avoid these fines and penalties because the line between independent contractors and employees isn’t always clear.
Which forms do you need when hiring an independent contractor?
Once you have established the worker’s independent contractor status, employers must provide and file various tax forms when hiring 1099 contractors to ensure that they are compliant with legal requirements. The forms you need to complete will vary depending on the type of contractor, the amount they are paid, and when payments are made.
Form W-9
The first step is to send Form W-9 (Request for Taxpayer Identification Number and Certification) to the contractor, which requests their Social Security number (SSN) or Taxpayer Identification Number (TIN) and their legal name. If the contractor acts as a business entity, it also asks for Employer Identifier Number (EIN). They complete it and return it to you with the requested information.
The form is used to make payments to the appropriate individual or business, so the IRS can receive the correct information when filing.
It is your duty as the client to send Form W-9 to the contractor at the start of your working relationship, but they can also provide one unsolicited. Because the IRS doesn’t collect this form, it is not subject to any deadline. But you need to obtain the W-9 information by 31st January because you need it to file Form 1099-NEC (discussed later), and 31st January is its due date.
If you don’t obtain the W-9 information, IRS can penalize you. You can avoid the penalties by demonstrating that you made at least three attempts to get the information. If you tried at least thrice, but the contractor didn’t provide the information, they are subject to a $50 penalty per attempt. You can apply backup withholding if they don’t provide a valid TIN.
The form should be on file for four years for future reference if the need arises. If the provided information changes, it should be resubmitted.
Forms W-8BEN and W-8BEN-E
Forms W-8BEN-E (Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)) and W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)) are W-9s for non-US contractors.
If you are hiring an individual non-US contractor, you need to have them complete Form W-8BEN. But if they act as a business entity, they must fill out the W-8BEN-E and submit it to you.
State-specific forms
Depending on the state you are in and the nature of the work, additional forms, like state withholding forms, may be required. To ensure compliance with all state and federal laws, consult a local legal or tax professional to understand all the forms you need.
Other forms and documents unrelated to reporting and taxation that you might need when hiring independent contractors include:
- Non-disclosure agreement
- Non-compete agreement
- Non-solicitation agreement
- Independent contractor agreement
Which forms do you need when reporting payment to an independent contractor?
You need the forms below when reporting payment to an independent contractor:
Form 1099-NEC
Form 1099-NEC (Nonemployee compensation) is a form businesses use to report payments made to independent contractors within a tax year. The IRS uses it to determine the amount of taxable income acquired by independent contractors.
Form 1099-NEC was part of Form 1099-MISC but became a separate form in 2020. It provides information on the amount the business paid the independent contractor and any tax withholding that occurred, and the purpose for withholding.
You are required to file Form 1099-NEC if:
- You paid the independent contractor $600 or more for their services
- The independent contractor isn’t registered as a C corporation or S corporation
- You did not hire the independent contractor from freelance platforms like Upwork and Fiverr
After preparing Form 1099-NEC, make four copies. Keep one with the business for record-keeping, then submit one to the IRS along with Form 1096, one to the state’s department of revenue, and one to the contractor. You can send it to the contractor electronically if they consent.
The 1099-NEC must be filed by 31st January of the year following the payment. If it falls on a weekend or a holiday, the deadline is moved to the next business day. If you miss the deadline, the IRS penalizes the following amounts for each 1099-NEC form.
- $50 per form if you file it within 30 days of the deadline
- $110 per form if you file it more than 30 days from the deadline but before 1st August
- $280 per form if you file it after 1st August
If you intentionally miss the 1099-NEC due date, IRS will penalize you at least $560 per statement with no maximum limit. The fees can add up to millions of dollars if you work with many independent contractors.
If the income is not enough to be reported on Form 1099-NEC, it should still be reported on Schedule C of the federal tax return. You can order hard copies of Form 1099-NEC at the IRS website.
Form 1096
Form 1096 (Annual Summary and Transmittal of U.S. Information Returns) is a report that summarizes the informational returns that a business files. It is completed by the business preparing Form 1099-NEC and is filed only with the IRS along with the forms it is transmitting, such as 1099-NEC. It contains the following information:
- Your name
- Your address
- Your taxpayer identification number (TIN)
- Total number of forms included in the transmittal
- The total dollar amount of the payments reported on the submitted forms
Form 1096 must be filed by the same due date as the forms it is transmitting, which is 31st January of the year following the payment.
Note: Like the forms required when hiring an independent contractor, some additional forms may be required depending on the state you are in.
Ensuring tax compliance
As businesses increasingly turn to independent contractors to meet their workforce needs, they must implement procedures to ensure they comply with the additional tax reporting requirements. Keeping accurate records and filing taxes on time will only get more challenging with an increase in independent contractors. Everee can help you stay on top of tax documentation—we’re a workforce payments platform that handles tax calculations and filings, generating and distributing tax forms, and more.
Get a free demo of Everee today.