Business Taxes: 1099 Independent Contractors

As we started discussing in our last blog post – and the first blog post in our Business Taxes series – your business is required to pay certain taxes and file additional paperwork if you have employees. Depending on which type of employees your business hires and employs, your business will be responsible for different tax responsibilities and IRS paperwork. If you are looking for more information about the different types of employees, check out our first blog post in the series, Business Taxes: Employment Taxes. 

In this blog post, we’ll be discussing the forms and paperwork your business is required to file if you employ 1099 independent contractors.

Payroll and Employment: 1099 Independent Contractors

Form W-9

As of January 31st, 2021, according to the IRS Page Forms and Associated Taxes for Independent Contractors, “if you’ve made the determination that the person you’re paying is an independent contractor, the first step is to have the contractor complete Form W-9, Request for Taxpayer Identification Number and Certification. This form can be used to request the correct name and Taxpayer Identification Number, or TIN, of the worker. The W-9 should be kept in your files for four years for future reference in case of any questions from the worker or the IRS.”

As you can see, for tax purposes, you must have any independent contractors your business employs complete a Form W-9. This will be necessary later on for tax purposes when you file the business taxes for your business, and like the end of the except from the IRS page says, you’ll want to hang onto that form for four years. As of January 31st, 2021, according to the IRS Page About Form W-9, Request for Taxpayer Identification Number and Certification, Form W-9 is used, “to provide your correct Taxpayer Identification Number (TIN) to the person who is required to file an information return with the IRS to report.”

Form 1099-NEC

The second form your business will be required to file with the IRS if you employ 1099 independent contractors rather than W-2 employees is the Form 1099-NEC. While new business owners might not notice, those who have employed independent contractors for some time might notice a difference, as the Form 1099-MISC had been the customary form to file taxes related to 1099 independent contractors. However, as of January 31st, 2021, according to the IRS Page Forms and Associated Taxes for Independent Contractors, “Note: Beginning with Tax Year 2020, you must use Form 1099-NEC, Nonemployee Compensation, to report payments of nonemployee compensation (NEC) previously reported in box 7 on Form 1099-MISC. The separate instructions for filers/issuers for Form 1099-NEC are available in the 2020 Instructions for Forms 1099-MISC and 1099-NEC.

“Form 1099-NEC is used by payers to report payments made in the course of a trade or business to others for services.”

Form 1099-NEC will be a crucial form if your business employs 1099 independent contractors. In the next blog post, we’ll discuss it in further detail before moving onto the forms and tax responsibilities required of small businesses employing W-2 employees.

Sources

https://www.irs.gov/businesses/small-businesses-self-employed/forms-and-associated-taxes-for-independent-contractors

https://www.irs.gov/forms-pubs/about-form-w-9