What is a W-9 and a 1099?
It's that time of year again where many business owners are scrambling to review their collection of W-9s and making sure they have them all before the dreaded January 31 1099 deadline. Even though this requirement has been in place for almost a decade, many business owners still get confused if/when they need to collect these documents.
What is a W-9 and why do I have to collect them?
Long story short: The Small Business Jobs Act of 2010 implemented a requirement for anyone who made a payment as a small business or self-employed individual in excess of $600 to file a 1099-MISC. The W-9 document gives you the data you need in order to file the 1099.
For the most part this involves more than $600 in services (not goods) in which you paid via cash or check (not credit card). If you paid someone via credit card, the card processor will take the responsibility of sending them a 1099-K so you don’t have to send a 1099-MISC.
Confused yet? It gets worse...
Generally, you also do not have to send a 1099-MISC to an incorporated entity or an LLC that has elected to be treated as a C-Corp or S-Corp. However, you should be aware of some obscure requirements that trigger a 1099-MISC such as any amount of royalties in excess of $10. When in doubt, send a 1099 because it won’t hurt you! For a more in-depth (and reliable) explanation, you can check out the IRS 1099-MISC instructions here.
As a best practice, you should require your contractor to give you a copy of their W-9 before they get paid. This is because someone really doesn't have any incentive to help you after they've gotten paid, unless you have an ongoing partnership with them.
What is a 1099?
Even though you've been collecting W-9s throughout the year as you pay contractors, this is not the document that gets filed with IRS. As mentioned above, the 1099 is the actual document that gets filed with the IRS and sent to the contractor both.
The 1099 is simply an informational document that gets sent to the IRS and the contractor and does not necessarily trigger any tax. I've had an upset contractor scream in my face, "You mean you're going to tax me on THIS?!"
Well, no. I am not taxing you on anything. The IRS on the other hand....
This document is simply and FYI only. It serves as a reminder to you that you may have to declare it as taxable income, depending on your personal situation. For the IRS, it serves as an FYI that you received a payment that may be taxable.
Basically, you should assume you have to send a 1099 to all of your contractors unless any of the following are true:
Paid less than $600 during the calendar year (unless you paid royalties)
Paid for goods, not services
Paid with a credit card
Paid to an incorporated entity that is not acting as an individual, sole proprietor, or pass through entity
What do I need in order to file a 1099?
In order to file a 1099, you’ll need the recipients Taxpayer Identification Number (aka TIN). This could be an EIN for an LLC or a SSN for an individual, which is found on the W-9. Next, you will also need to know how much you paid them during the year and you will reduce that by any amount paid with a credit card.
Overall, W-9s and 1099s can be overwhelming if you’re not familiar with the process, especially since they are due to the IRS and contractor by January 31 every year. Please don’t hesitate to reach out to Remote CPA if you’d like help with your 1099 process!
Call at (317) 520-1414