What Form Do I Give a Subcontractor?
Understand the essential IRS forms and steps for correctly classifying and reporting payments to independent contractors and service providers.
Businesses and individuals often engage outside professionals for various services, ranging from specialized consulting to project-based work. Properly documenting payments made for these services is an important aspect of financial record-keeping and tax compliance. Understanding the necessary forms ensures accurate reporting to tax authorities and helps avoid potential complications.
Determining Subcontractor Status
Correctly classifying a worker as an independent contractor (subcontractor) or an employee is a foundational step. The Internal Revenue Service (IRS) provides specific guidelines to determine this status, focusing on the level of control a business has over the worker. Misclassification can lead to significant penalties for the business.
The IRS uses three main categories to assess the relationship: behavioral control, financial control, and the type of relationship. Behavioral control examines whether the business has the right to direct or control how the worker performs the job, including instructions on how and when to do the work.
Financial control considers aspects such as how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies. An independent contractor generally incurs their own business expenses and can realize a profit or loss from their work. The type of relationship looks at factors like written contracts, the provision of employee-type benefits, and whether the relationship is expected to continue indefinitely.
Requesting and Using Form W-9
Once a worker is determined to be an independent contractor, the business needs to collect specific information. Form W-9, “Request for Taxpayer Identification Number and Certification,” is the primary document for this purpose. This form is requested from the subcontractor and retained by the business for its records; it is not submitted to the IRS by the payer.
Form W-9 obtains the subcontractor’s correct name, address, and Taxpayer Identification Number (TIN). The TIN can be either a Social Security Number (SSN) for individuals or an Employer Identification Number (EIN) for businesses. This information is crucial for accurately reporting payments made to the subcontractor to the IRS.
The subcontractor completes and signs the Form W-9, certifying the information is correct and that they are not subject to backup withholding. The business then uses the information from the completed W-9 to prepare other required tax forms at the end of the year. Obtaining a W-9 early in the relationship helps ensure all necessary information is available for annual reporting.
Issuing Form 1099-NEC
After the close of the calendar year, if a business has paid an independent contractor for services, it may need to issue Form 1099-NEC, “Nonemployee Compensation.” This form reports the total amount paid to the subcontractor during the year and is filed with the IRS, with a copy provided to the subcontractor. The information gathered on Form W-9 is used to complete the 1099-NEC, ensuring accuracy in reporting.
Generally, a Form 1099-NEC must be issued if the total payments for services to a non-employee in the course of a trade or business amount to $600 or more in a calendar year. This threshold applies to payments made to individuals, partnerships, estates, and in some cases, corporations. The deadline for furnishing Form 1099-NEC to the recipient and filing with the IRS is typically January 31 of the year following the payment.