As the end of the year approaches, small business owners and businesses are gearing up to prep for the tax year. Tax preparation and taxes can be confusing, and tax compliance can be a real chore for marketing and finance teams. With recent tax law updates from the IRS (Internal Revenue Service), knowing whether to issue 1099s or form W-9s if you’ve paid independent contractors can be even more confusing.
If you’re a business owner, brand, or enterprise and have worked with independent contractors, freelancers, or creators in a paid capacity, you’ll need to file a Form 1099-MISC. The vendor setup and management process are tedious, between onboarding vendors to your payment platform, collecting banking details, and communicating between internal and external partners.
Having a centralized vendor approach that not only manages payments to vendors, all tax compliance domestically and internationally and can integrate on top of existing AP software is critical. It will save your team dozens of hours of extra work. From the tax forms you need to collect, issue, and manage, we'll walk you through a step-by-step process for everything your brand and business need to know about collecting and issuing tax forms.
What is Form W-9?
Form W-9 is a commonly used form issued by the IRS that provides all the necessary information to a business making payments to another person/entity. Often this can be when a person works as an independent contractor or is a self-employed individual for another business.
If your business hires vendors, independent contractors, or self-employed people, you should always request a W-9 from them if they're not given to you voluntarily. Companies may request a W-9 to accurately prepare a 1099 to report the income they pay you.
Use Form W-9 to provide your correct Taxpayer Identification Number (TIN) to the person who is required to file an information return with the IRS to report, for example:
- Income paid to you
- Real estate transactions
- Mortgage interest you paid
- Acquisition or abandonment of secured property
- Cancellation of debt
- Contributions you made to an IRA
What do Businesses Need to Know About W-9 Forms?
W-9 forms should be collected at the beginning of any contractual agreement between the independent contractor and a business to ensure vendors report payments.
If you’re a business owner, the best approach is to be proactive in requesting that vendors or independent contractors fill out a W-9 form before they begin work or before they can get paid.
Form W-9 requires:
- Name of a person or a business: this is the legal name or title under which a person or entity performs a service or labor.
- Tax Identification Number: any person or entity filing a tax return should provide a set of numbers to help identify them, including a Social Security Number, Employer Identification Number (EIN), Individual Taxpayer Identification Number (ITIN), Taxpayer Identification Number for Pending U.S. Adoptions (ATIN), Preparer Taxpayer Identification Number (PTIN).
- Business type: each business classification is subject to different taxes. Classifications include individual, sole proprietorship, single-member LLC, C Corporation, S Corporation, Partnership, Limited Liability Company (LLC), and Trust/Estate.
- Business contact information: business owners will provide a mailing address so businesses can send Form 1099-MISC or Form 1099-NEC at the end of the tax year.
- Some businesses are exempted from taxes, but these typically have a tax code associated with them, such as nonprofit organizations.
If an individual fails to provide you and your business with the necessary information, you should still submit a Form 1099 in order to avoid penalties.
Responsibilities and Penalities for Businesses
Businesses may face serious penalties for failing to collect W-9 forms and submit 1099 forms.
Responsibilities for businesses:
- Have the independent contractor complete Form W-9, Request for Taxpayer Identification Number and Certification
- If you paid an independent contractor $600 or more for services provided during the year, a Form 1099-NEC needs to be filed, and a copy should be provided to the independent contractor by January 31
- Send a copy of the Form 1099-NEC to the IRS by January 31
- If the independent contractor fails to complete and provide Form W-9, ensure to document all attempts to request the information (a minimum of three attempts are needed to avoid any penalties from the IRS)
- Withhold federal taxes at a rate of 24% to ensure all proper taxes are withheld and remitted to the IRS
Penalties for businesses:
- Civil and criminal penalities if you mishandle or improperly discloses an individual’s TIN or SSN that is provided on a W-9
- Varying penalty rates if you fail to file 1099s by the deadline or file information incorrectly – fines range from $50 to $570 per form
What is Form 1099?
The IRS Form 1099 is a tax form that keeps a record of any/all miscellaneous income made by taxpayers that isn’t your employer. This income could include interest from your bank, dividends earned on investments, and compensation as a freelancer.
The payer will complete the form with the necessary information and will send this form to the IRS, reporting any payments made to the payee in the tax year.
As the payor, you’re responsible for completing form 1099 and sending it to the freelancer or vendor.
What do Businesses Need to Know About 1099 Forms?
There are several types of 1099s a business can issue. Some examples of reporting requirements include:
- If you paid $600 or more in nonemployee compensation to a person or business who is not a W2 employee of your business, you should send a Form 1099-NEC
- If you received $600 or more in rent or royalty payments, you should also receive Form 1099-MISC
- If you received a state or local tax refund during the previous year, you should expect to receive Form 1099-G
It’s important to keep track of and report any income received outside of a regular salary to avoid getting audited by the IRS.
The IRS uses this data to compare it with the information reported on 1099 forms with the income taxpayers report on their Form 1040, which is used to report your federal income tax returns.
When Do You Issue Form 1099?
Any business that outsources work to an independent contractor (and pays them more than $600) must file a 1099-NEC (which is required to report payments for any “Nonemployee Compensation”)with the IRS for each of the payees it works with and issue a copy to the payee as well. This ensures that the payee reports that income on their tax return.
The IRS requires you to issue Form 1099-NEC under any of the following conditions:
- Your business pays a person/entity that is non-W-2 employee
- This payment was in exchange for services to ordinarily run a business
- This payment was to a person, estate, partner, or corporation
- This person received $600 or more during the tax year
Any vendor, independent contractor, or self-employed person/entity who is contracted to work with a brand, should request a copy of their 1099 for end-of-the-year tax filing purposes if they don’t receive it.
If you’re paying vendors in the form of bank transfer, ACH, cash, check or credit cards, you’re required to issue a 1099-NEC. This includes payment in the form of income, rents, services, awards, and prizes.
As of 2020, businesses working with independent contractors were required to report payments using Form 1099-NEC, although these payments were initially reported on Form 1099-MISC. This is an opportunity for vendors to report income payments regarding tax filing.
You must still issue a 1099-NEC if you made any payments through PayPal or third-party settlement organizations (also known as TPSOs), including Venmo, Etsy, Lyft, Uber, and more.
Due to the recent change to tax laws in 2022, as of January 1, 2022, any platform that accepts payments from a party on behalf of another party will be required to issue Form 1099-K to an independent contractor.
If you’re a business paying contractors using PayPal through the Friends and Families service options, you may still be required to issue a 1099-NEC even if you paid through a third-party vendor. Businesses may send payment to independent contractors via the “friends and family” options because it’s free (if the recipient is in the US and the brand is paying from a bank account). But you should be cautious if you’re sending payment for “goods and services”.
When Are W-9s and 1099s Due?
To put it simply, if your brand hires a 1099 employee, you are responsible for collecting a W-9 from them to file a Form 1099 at the end of the year. W-9 forms should be issued at the outset of a contractual agreement or obligation, and this information should be obtained to complete and file a 1099 by January 31. While there is no deadline to submit a W-9 to the IRS, failure to collect the necessary information to file 1099 could result in a fine.
The IRS requires that 1099s are filed by January 31 after the calendar year-end. If you don't submit a Form 1099 on time or submit it late, you will be subject to a penalty and charged monthly interest.
What’s the Best Way to Collect W-9s?
This is where an automated centralized vendor approach comes into play, especially critical if you work with many freelancers like influencers. Lumanu is the only creator-focused payouts platform that acts as a single vendor and automates the entire vendor setup. It's an all-in-one payouts solution that removes the hassles from navigating end-of-the-year tax filing.
In addition to automating and managing W-9s from your vendors, Lumanu also handles issuing 1099s. Onboarding your 1099 employees is grueling enough, but thankfully, Lumanu also handles the administrative tasks that take up the most time. Think of it as having a dedicated colleague who manages the entire vendor setup process from start to finish. Plus, every account comes complete with a dedicated creator success team to ensure your 1099 employees experience a smooth onboarding and are walked through the process every step of the way.
To learn more about how your brand can automate your vendor setup process and eliminate the hassle of collecting W-9s and issuing 1099s, schedule a demo with us.