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Engaging independent contractors brings specialized skills to specific projects and drives growth efficiently. A strategic way to scale your business.
However, it is crucial to understand what form for contractors need to be filled out to ensure proper classification and tax compliance.
In this blog, we discuss the necessary forms and how to complete them to comply with IRS regulations.
The first step in ensuring correct payment for independent contractors is getting them to complete the form for contractors known as Form W-9, which requests for Taxpayer Identification Number, and certification.
This form gets the contractor’s correct name and Taxpayer Identification Number (TIN).
Employers must keep this form for contractors on file for at least four years for future reference in case of any questions from the worker or the IRS.
Starting from Tax Year 2020, businesses must use the form for contractors called Form 1099-NEC, Nonemployee Compensation, to report payments of $600 or more made to independent contractors.
The form for contractors should be provided to the contractor by January 31 of the following year, and a copy must also be sent to the IRS. This form replaces the requirement to report nonemployee compensation in box 7 on Form 1099-MISC.
When filing taxes by mail, businesses must include a form for contractors known as Form 1096 as a summary document accompanying Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G. A separate Form 1096 is required for each type of return submitted.
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Working from home avoids commuting, and fewer commuters result in
lower greenhouse gas emissions.
Backup withholding at a rate of 24% applies if a contractor does not provide a TIN or provides an incorrect TIN.
Nonresident aliens withholding rate of 30% may apply unless reduced by a tax treaty.
Form 945, Annual Return of Withheld Federal Income Tax must be filed if backup withholding is required.
For nonresident aliens, Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and Form 1042-S must be filed.
The Information Returns Intake System (IRIS) Taxpayer Portal allows businesses to electronically file the form for contractors securely and at no cost.
This method reduces expenses related to paper filing and simplifies the submission process.
The Filing Information Returns Electronically (FIRE) system is designed for financial institutions and others to file Information Return Forms such as 1042-S, 1098, 1099, and W-2G. However, FIRE requires specific software to produce the files in the proper format.
From January 1, 2024, the threshold for mandatory electronic filing of information returns has been reduced to 10 returns. Employers must aggregate almost all information return types to determine whether they meet the 10-return threshold.
This includes forms such as Form 1042-S, 1094 series, 1095 series, 1098 series, 1099 series, 3921, 3922, 5498 series, 8027, W-2G, and W-2.
Independent contractors who want to work and get paid in the U.S. must be classified correctly for tax purposes. Ensuring independent contractor compliance (IC Compliance) is critical to steer clear of penalties and complications.
Contractors must provide a TIN to the IRS and the government for tax purposes. For U.S. citizens, their Social Security Number (SSN) typically serves as their TIN.
Non-U.S. citizens without an SSN can apply for an Individual Taxpayer Identification Number (ITIN) or an Employer Identification Number (EIN).
Understanding what forms contractors fill out is essential for proper classification and compliance. It mitigates the risk of misclassification of employees.
Misclassification leads to significant financial and legal repercussions for businesses, making it important to comprehend and stick to independent contractor compliance guidelines.
According to a study by the Economic Policy Institute, misclassification of employees as independent contractors leads to substantial losses and affects millions of workers.
In tax revenue, the US government loses close to $3.7 billion annually because of this.
Recent data underscores that misclassification deprives workers of crucial protections under federal and state labor laws, affecting their access to benefits like unemployment insurance and workers’ compensation.
For example, the IRS reports that in 2020 alone, millions of workers were misclassified, leading to substantial losses in tax revenue and social insurance contributions.
Proper classification not only protects workers' rights but also ensures businesses avoid costly penalties and contribute fairly to public resources, highlighting the critical importance of diligent IC compliance and accurate classification practices
By following the guidelines and using the appropriate form for contractors, businesses can minimize the misclassification risk and ensure smooth and compliant operations when working with independent contractors.
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No. Employees fill out a W-4 form, while independent contractors complete a W-9 form for contractors.
Independent contractors receive Form 1099. Employees receive Form W-2 at tax time.
No. Employers complete a 1099 form to report payments to contractors, while contractors fill out a W-9 form for contractors to provide necessary payment information.
A contractor is typically associated with a 1099 form. The W9 form is filled out by the contractor to provide their taxpayer identification information to the client. The client then uses this information to prepare the 1099-NEC form for contractors, which reports the contractor's income to the IRS.
Contractors usually receive the 1099-NEC (Nonemployee Compensation) form. This form for contractors reports the payments made to contractors for services rendered in a tax year.
The W9 form is used by contractors to provide their taxpayer identification number (TIN) and other identifying information to the client or payer. This information is necessary for the client to prepare the 1099 form for contractors and report the payments to the IRS.
The 1099 form is used to report various types of income other than wages, salaries, and tips to the IRS. For contractors, the 1099-NEC form specifically reports nonemployee compensation, such as payments for freelance or contract work.
Sandeep Patel is a Content Marketing Manager and Strategist. Over the last five years, he has created and managed content for global brands and fintech startups. He is passionate about remote work and using tech for a better work-life balance.
