When handling important financial details and tax information, many small business owners, freelancers and contractors are not sure where to start. It is not uncommon for new entrepreneurs to confuse one form for another, and this can create a huge headache if you don’t know what you are doing.
In this article we are going to briefly look at two of the most common tax forms that small business owners should know, their functions, and what information should be included on the forms.
These forms are the 1099 and the W-9. Keep reading to learn more.
Understanding the Difference
The main difference between these two forms is one of function. Namely, Input vs Output.
A W-9 is used to collect information, whereas a 1099 is used to report it.
The 1099 form is used to report earnings and income to the IRS, whereas a W-9 is an input document used by contractors to provide the employer’s payroll department so that the company can report the contractor’s earnings at year-end. The 1099 is the form that the contractor receives from the employer at year-end reporting their income.
When to use a W-9
A W-9 Form is an IRS document. If you were hired by someone as an independent contractor, you need to fill out a W-9 Form. Employers and clients use the information contained in the form to report your earnings to the IRS, as well as to provide you with a 1099 to calculate your end of year income taxes. According to the website fitsmallbusiness:
“The best time to gather contractor data on a W-9 is when you first begin working with the contractor.”
The simplest explanation of why, is that if a contractor earns over $600 in the tax year, it is necessary to include those figures on your, and their tax return forms at the end of the year.
By filling and filing the W-9 early, a contractor provides the employer with the information needed to complete the year-end 1099.
How to Fill Out a W-9
As is the case with any tax form, it is important that you take the time to properly fill out all applicable sections of your W-9 so that there is no errors that could foul up the process at the end of the year. Incorrect taxpayer information is among the leading causes of IRS Audit. Properly filling out the preliminary forms is the first line of defense to save you from a nightmare situation.
You should fill out your W-9 as such:
- In box 1, type or write your full name.
- In box 2, type or write your business’s name (if you have one). If not, leave it blank.
- In box 3, check the box that describes you or the legal status of your business.
- If you are filling the form out for yourself and you are not being contracted through a company that you own or work for, check the “Individual” box.
- In box 4, only complete if you have an exemption code. Leave it blank if you are an individual.
- In box 5, type or write your street address.
- In box 6, type or write your city, state, and zip code.
- Box 7 is optional, only fill in this section if you have an account number that your employer will need.
You will also need to fill in your Social Security Number, Taxpayer Identification Number (TIN) or Employer Identification Number (EIN). Fill in the section that applies to you and make sure to only put one number in each box
- If you are an individual, you will need to type or write your social security number in the appropriate space.
- If you are a resident alien, sole proprietor, or disregarded entity, type or write your Taxpayer Identification Number.
- For all other entities, you will need to fill in your Employer Identification Number.
Finally, you will need to sign and date the form. Take a few moments to make sure that you have read over the completed form and check to see if everything is correct. Read through the “Certification” information in Part II as well, so that you know what you are signing off on. Only sign if everything is accurate. If everything is correct and you have finished reading the certification information, sign your legal name and include the date.
What is a 1099?
The 1099 form is a set of documents referred to by the Internal Revenue Service (IRS) as “information returns.” There are several different 1099 forms, each used to report a different type of income you may receive throughout the year in addition to your yearly salary or regular hourly wage. The person or entity that pays you is responsible for filling out the appropriate 1099 tax form and sending it to you by January 31.
According to the TurboTax website:
“If you are a worker earning a salary or wage, your employer reports your annual earnings at year-end on Form W-2. However, if you are an independent contractor or self-employed you should receive a Form 1099-MISC from each business client that pays you at least $600 during the tax year.
For example, if you are a freelance writer, consultant or artist, you hire yourself out to individuals or companies on a contract basis. The income you receive from each job you take should be reported to you on Form 1099-MISC. When you prepare your tax return, the IRS requires you to report all of this income and pay income tax on it. You are still required to report all of your income even if you do not receive a 1099-MISC.”
The Different 1099 forms
- Form 1099-DIV is used to report the dividends and other distributions you receive from stock investments or mutual funds
- Form 1099-INT is for reporting periodic interest payments such as those from interest bearing bank accounts. Typically, banks will automatically issue these forms to you at the appropriate times of year.
- Form 1099-G is used by government agencies to report the state income tax refunds and unemployment compensation you receive during the year, such as unemployment pay.
- Form 1099-R reports your total withdrawals from IRA’s as well as other types of distributions you receive from pension plans, annuities and profit-sharing plans.
- Form 1099-C is used for debt cancellations. Specifically, when a creditor cancels a portion of your outstanding debt the IRS treats the debt cancellation as income which may be taxable to you.
Final Thoughts
At the end of the day, many business owners are not trained or well versed in the in’s and out’s of tax law. There are miles and miles of red tape and hoops to jump through, all of which pulls attention and time away from more important aspects of running a business. It is for this reason, that many small and large companies opt to outsource important tasks such as tax prep and payroll functions to a skilled and qualified financial management team like Excellent Admin.