What Form to Give to Independent Contractor?
Learn which tax forms are essential for properly engaging independent contractors. Ensure compliance and accurate payment reporting.
When engaging independent contractors for services, businesses must navigate specific tax compliance requirements to ensure proper reporting of payments. This involves understanding the distinctions between employees and non-employees and utilizing the appropriate Internal Revenue Service (IRS) forms. Proper classification and reporting help both parties meet their tax obligations and avoid potential penalties.
Understanding the W-9 Request
Businesses needing to collect tax information from independent contractors use Form W-9, officially titled “Request for Taxpayer Identification Number and Certification.” The primary purpose of this form is for the payer to obtain the contractor’s correct Taxpayer Identification Number (TIN) and other identifying information, crucial for accurately reporting payments to the IRS. Unlike some other tax forms, the W-9 is not submitted to the IRS by the payer; instead, it is kept on file for record-keeping purposes.
It allows the business to verify the contractor’s tax identity before payments are made, helping to prevent issues such as backup withholding. Backup withholding occurs when a contractor fails to provide a correct TIN or when the IRS notifies the payer that the contractor is subject to it due to underreported income. If backup withholding is triggered, the payer is generally required to withhold a percentage, currently 24%, of payments and send it directly to the IRS. Obtaining a completed W-9 helps avoid these complications and ensures correct year-end tax statements.
Essential Information on Form W-9
An independent contractor completing Form W-9 provides specific details crucial for accurate tax reporting. The form requires the contractor’s full legal name as it appears on their income tax return. If the contractor operates under a business name different from their legal name, that business name is also entered. The contractor must indicate their federal tax classification, such as individual/sole proprietor, partnership, C corporation, S corporation, or limited liability company (LLC).
The contractor’s mailing address, including street, city, state, and ZIP code, must be provided. The Taxpayer Identification Number (TIN) is also required. For individuals, this is typically their Social Security Number (SSN), while businesses usually provide an Employer Identification Number (EIN). The form also includes a certification section where the contractor attests that the provided TIN is correct and that they are not subject to backup withholding, or that they are exempt.
Reporting Payments with Form 1099-NEC
The information collected on Form W-9 is then utilized by the business to prepare and issue Form 1099-NEC, Nonemployee Compensation. This form is used to report payments of $600 or more made to a nonemployee for services performed in the course of the business’s trade or business. This threshold applies to payments made to individuals, partnerships, or estates, and sometimes corporations, for services.
The business must send a copy of Form 1099-NEC to the independent contractor and file a copy with the IRS. The deadline for both providing the form to the recipient and filing it with the IRS is typically January 31 of the year following the payment. If this date falls on a weekend or holiday, the deadline shifts to the next business day. While the current reporting threshold for Form 1099-NEC is $600, it is important to note that this threshold is set to increase to $2,000 for tax year 2026, with further inflation adjustments in subsequent years.