Tax Forms for Independent Contractors: What Businesses Need to Know
When you're looking for unique skills or trying to fill gaps in job responsibilities without hiring a full-time employee, independent contractors may meet your needs. Employers that outsource some of their functions must know how to file tax forms for independent contractors. If your business uses the services of this type of worker, you should be familiar with independent contractor tax forms and their filing requirements.
What is an independent contractor, according to the IRS?
Independent contractor is the term used by the IRS to designate a type of worker who contracts their services to a business. They are more like business partners or vendors than actual employees. Independent contractors don't receive company benefits, and you don't need to withhold payroll taxes from their compensation.
Classify your independent contractors correctly for tax purposes
Because they have different tax implications than employees and require specific independent contractor tax forms, it's important to classify contract workers correctly. Failing to withhold payroll taxes for independent contractors who are deemed by the IRS to be employees can lead to penalties. Also, workers who should be classified as employees, not independent contractors, may be eligible for benefits like healthcare insurance. Business owners should determine whether a worker is considered an independent contractor or an employee at the time of hire.
To assist in the classification of independent contractors versus employees, the IRS generally focuses on the relationship between the worker and the business in three main categories:
- Behavioral control, or the level of control a business owner has over how the work is performed.
- Financial control that the business has over the business aspects of the worker's job, including the extent to which the worker has unreimbursed business expenses, the extent of the worker's investment, and the extent to which the worker can realize a profit or incur a loss.
- Relationship type that exists between the worker and the employer, such as written contracts and employee benefits, like a pension plan, insurance, sick leave, and vacation pay.
What tax forms are needed for an independent contractor to be hired?
When you engage the services of an independent contractor, your first step is to draw up the terms of the work arrangement. Generally, a contract will be signed to formalize the services rendered and the payment rate. The next step is to request that the contractor complete a W-9 form and provide proper identification. When payments over $600 are made in a year, the company must provide the independent contractor with a 1099-NEC for tax reporting. Royalty payments in excess of $10 must be reported on a 1099-MISC.
1. IRS Tax Form W-9
A W-9 form is used by a company to request a contractor's taxpayer identification number (TIN). This will ensure that payments are made to the appropriate individual or the contractor's business, and that the IRS will receive the correct information when it's time for filing. The TIN reported on the form can be the contractor's Social Security number or an employer identification number. This tax form for independent contractors should be kept on file for four years in case questions arise from either the contractor or the IRS.
Who completes the W-9 form? The independent contractor should complete the W-9 form and return it to the business with other requested information.
When should the W-9 form be completed? The W-9 should be completed by contractors at the start of their working relationship with a company.
What is the submission deadline for Form W-9? There is no IRS filing deadline for W-9s. Rather, the business paying the independent contractor must maintain the form and use the data supplied to ensure that proper compensation is issued.
2. IRS Tax Form 1099-NEC
As of the 2020 tax year, the IRS Form 1099-NEC is the independent contractor tax form used by businesses to report payments to a contract worker in the previous tax year. This tax form for independent contractors is filed with the IRS and is also provided to the contractor for reporting income. Previously, the 1099-MISC form was used for independent contractor payments, but this form is now used to pay royalties, rent, or payments classified as "other income."
How much money must an independent contractor earn to receive a 1099? Only those independent contractors who were compensated $600 or more for services rendered during the tax year are required to be issued a Form 1099-NEC. Business owners should run a year-end vendor report to determine which independent contractors were paid $600 or more during the previous tax year, and then issue completed 1099-NEC forms to qualifying contractors.
Who completes the Form-1099 NEC? Businesses using the services of independent contractors complete this form. They should send it to each contractor and file a copy with the IRS.
How do I get a 1099 Form for an independent contractor? Hard copies of the form can be ordered at the IRS website. An electronic version of the form may also be included with your tax software.
When should Form 1099-NEC be completed? Form 1099-NEC should be completed at the end of the year and sent to independent contractors at their correct addresses. You can also send the form to a recipient electronically with the contractor's consent.
What is the filing deadline for Form 1099-NEC? The filing deadline for Form 1099-NEC is generally January 31. If this date falls on a weekend or holiday, the deadline will be moved to the next business day.
What is the penalty for not submitting a Form 1099? The IRS imposes penalties for businesses with gross receipts less than $5 million that file information returns late or fail to file at all. For the 2021 tax year, fines are assessed as follows:
- $50 per form (maximum $1949500) filed up to 30 days late
- $110 per form (maximum $571,000) filed 31 days late but before August 1
- $280 per form (maximum $1,142,000) filed after August 1 or not at all
Additionally, if the IRS finds intentional disregard, fines are $570 per form, with no maximum. If your business employs many independent contractors, the per-form penalty fees can add up quickly.
How do independent contractors report income without a 1099 form? Income not reported on a 1099 should still be reported on Schedule C of your federal tax return. Contractors should save any documentation received to support this income (check copies, etc.) with their tax records.
3. IRS Tax Form 1096
A Form 1096 is a summary report of the informational returns filed by a business. This form is filed only with the IRS and not given to independent contractors.
Who completes the 1096 form? The company preparing the 1099 forms would also prepare Form 1096. This form should be completed and submitted with the company's informational returns when they are filed in paper form. Electronic filing instructions are found in IRS Publication 1220.
When should the 1096 form be completed? The form should be completed at the end of the business year, when 1099-NEC forms for non-employee compensation are due (January 31, 2021 for the 2022 tax year).
What is the filing deadline for Form 1096? The Form 1096 deadline is January 31 when summarizing 1099-NEC forms reporting non-employee compensation. Due dates may vary for other types of informational filings, so it's important to check each year when creating your tax reporting calendar.
What is the difference between W-9 and 1099 tax forms?
The difference between W-9 and 1099 tax forms for contractors lies in the information reported and who's responsible for filing each form. A W-9 form provides taxpayer information, is completed by the contractor, and is maintained by the business. A 1099-NEC is completed by the business and provided to the independent contractor as well as the IRS.
State requirements for independent contractor tax forms
Individual states may also require information from businesses regarding payment to independent contractors. In California, for example, a business must report independent contractor information to the Employment Development Department (EDD). Such information includes (but is not limited to):
- Taxpayer identification number
- Employer account number (if applicable in California)
- Independent contractor's full name and Social Security number
- The start date of contract (or date when payments of $600 or more were paid)
- The exact amount of payment
- Date when contract expires
The EDD uses this information when seeking to locate parents who have fallen behind in their child support obligations.
Other states have similar reporting and tax form requirements for independent contractors. Contact your state government for more information.
Understanding filing deadlines for independent contractor tax forms
Businesses must file Form 1099-NEC with the IRS by January 31. Business owners are also responsible for providing independent contractors with a copy of Form 1099-NEC by January 31 of the year following payment.
If discrepancies are found in any 1099-NEC forms, the business owner should follow the IRS directions to refile the form as soon as possible with the "corrected" box checked.
What tax form does a subcontractor need to fill out?
Business owners are not responsible for issuing 1099-NEC tax forms for subcontractors. Rather, independent contractors who hire extra help to complete their contracts should understand how to issue 1099 tax forms for their subcontractors; it's the independent contractor's responsibility to issue those forms.
As the employment landscape continues to shift and arrangements with independent contractors become more commonplace, businesses should have procedures in place to ensure compliance with additional tax reporting requirements. HR experts can offer assistance in various ways, from payroll management to help with tax forms for independent contractors. As questions arise about the nuances of employee and independent contractor classification under other regulations and laws, an HR consultant can also be a guide.