IRS Forms W-9 vs. 1099: A Complete Guide for Tax Season

Tax season can be challenging for independent contractors. There are many tax forms to fill out, and some details can be confusing.

If your income comes from non-traditional sources such as freelancing or consulting, you'll need to use IRS Forms W-9 and 1099 to report your actual earnings. Failure to do so could lead to serious consequences like penalties or even jail sentences. Wesley Snipes, for example, served 24 months in prison for failing to file income taxes for six years, amounting to $7 million in late payments.

To help you avoid any trouble, I’ll walk you through everything you need to know about the W-9 and 1099 forms. I will explain how they work together and how to fill them out correctly to stay compliant with the IRS since both forms are related but serve various purposes.

IRS Form W-9

A W-9 is a tax form issued by the Internal Revenue Service (IRS). The purpose of this form is for payee (individuals or businesses) to provide their Taxpayer Identification Number (TIN) to the person or company paying them. The TIN can be either a Social Security Number (SSN) or an Employer Identification Number (EIN).

Any client (person or business) requesting a W-9 requires it so they can report any money they pay you to the IRS. For example, if you’re a freelancer, your client uses this information to tell the government how much they paid you that year. This ensures that the IRS can track who’s paying taxes and how much.

The W-9 form is important because it helps businesses and the IRS keep track of payments made to you. It ensures that income is properly reported, so everyone pays the correct amount of taxes. If a business pays you more than $600 in a year for work, they must send a form called a 1099 (we’ll talk about it later) to the IRS, showing how much they paid you.

Who Needs to Fill Out a W-9?

Check who may need to fill out a W-9 form:

1. Freelancers and independent contractors. If you work as a freelancer (for example, a graphic designer, writer, or photographer), your client may ask for a W-9. Let’s say you do some graphic design work for a small business, and they pay you $1,000. They need your tax information to declare that income to the IRS.
2. Landlords. If you rent out property, your tenant might request a W-9 to file rent payments. For instance, if you’re a landlord renting out an apartment, your tenant’s company might require a W-9 so they can declare what they pay you if it’s a business lease.
3. Prize or award winners. If you win a cash prize in a contest or lottery, the company giving you the prize might ask for a W-9 to declare the payment to the IRS. Imagine winning $5,000 in a local radio contest — they need your W-9 to let the government know about your prize!
4. Partnerships and LLCs. Businesses like LLCs (Limited Liability Companies) and partnerships sometimes fill out W-9 forms. If your small business works with another company and they pay you for services, they might ask for a W-9 so they can properly record payments made to you.

Example 1: A Freelance Writer

Let’s say Sarah is a freelance writer who works for multiple clients. One of her clients, a marketing agency, pays her $2,000 for a series of blog posts. Before they can pay her, they ask Sarah to fill out a W-9.

Sarah provides her name, address, and SSN on the W-9. At the end of the year, the marketing agency sends Sarah a 1099-NEC form, showing that they paid her $2,000. Sarah uses that form when filing her taxes to declare her income to the IRS.

Example 2: A Small Business Owner

John runs a small landscaping business. He works with local homeowners and businesses, offering lawn care services. One of his business clients asks John for a W-9 form before they can pay him for a large project.

John fills out the W-9, using his business’s EIN instead of his SSN because his business is a registered LLC. At the end of the year, the business client sends John a 1099-MISC form, showing the total amount they paid him, which John uses to file income on his tax return.

How to Fill in Form W-9

Download Form W-9 from the IRS website. Filling it is pretty straightforward. Here’s what you need to include:

• Your identity. Use your legal name as it appears on your tax documents.
• Business name (if applicable). If you operate a business under a different identity, you can include that.
• Tax classification. Indicate whether you're an individual, one-person business, company, Limited Liability Company, etc.
• Taxpayer identification number (TIN). This will be either your SSN (for individuals) or an EIN (for businesses).
• Signature. Finally, you sign the form to certify the information you’ve provided is accurate.

What Happens After You Fill Out a W-9

After you fill out and submit a W-9, your work is mostly done. You don’t send the form to the IRS yourself; instead, you give it to the person or company that requested it. They keep it on file and use it to declare your earnings at the end of the year.

At tax time, you’ll receive a 1099 form from anyone who paid you $600 or more. This form shows how much they paid you over the year, and you’ll use it when you file your taxes.

Penalties for Failing to Provide a W-9 on Time

Backup withholding is the most common penalty for failing to provide a W-9 form on time. When you don’t give your tax information (like your Social Security Number or Employer Identification Number), the IRS requires the person paying you to withhold 24% of the payment. This means if you were supposed to receive $1,000, you’d only get $760 because $240 would be sent to the IRS as backup withholding.

This withholding continues until you provide a correct and completed W-9 form. Once you submit the W-9, payments should resume without withholding.

IRS Form 1099

The 1099 form is a tax document that plays a crucial role when submitting income to the IRS if you work as a freelancer, independent contractor, or receive other types of non-wage income. Similar to the W-9 form, it helps track money that isn’t part of your regular paycheck.

Unlike a regular paycheck, which has taxes withheld, payments reported on a 1099 often don’t have taxes taken out ahead of time. That means the person who receives the 1099 is responsible for declaring that income and paying the appropriate taxes.

The 1099 form is essential because it reports income that isn’t from a regular salary or wages. While regular employees receive a W-2 (which reports salary and wages), freelancers, contractors, landlords, and others receive a 1099 to file their freelance income.

For you, the 1099 helps ensure you accurately declare your income on your tax return. For the IRS, it helps track how much money businesses or individuals are paying out, ensuring that taxes are being paid on all types of income.

Who Needs a 1099 Form?

These are groups of people who might receive a 1099 form:

1. Freelancers and independent contractors. If you work as a freelancer or contractor and are paid more than $600 by a client during the year, they must send you a 1099-NEC form. For example, if you’re a freelance photographer who did a wedding shoot for $1,200, the couple or company that hired you will send you a 1099-NEC.
2. Landlords. If you rent out property to a business and are paid more than $600, they’ll send you a 1099-MISC form at the end of the year to file the payments. For example, if you own a small office building and a company leases space for $1,500 a month, you’ll get a 1099-MISC showing the total rent they paid.
3. Investors. If you have investments like stocks or bonds, you may receive a 1099-DIV or 1099-INT to declare dividends or interest income from your accounts. For instance, if you earn $800 in dividends from stocks, your brokerage will send you a 1099-DIV.
4. Gig economy workers. If you drive for a rideshare company, rent out a property through an app like Airbnb, or deliver food as a side hustle, you’ll receive a 1099 form from the company, as long as you earned over $600 during the year. For example, if you made $5,000 driving for Uber, you’ll get a 1099-K or 1099-NEC depending on the platform.

Example 1: Freelance Graphic Designer

Let’s say Emily is a freelance graphic designer. She worked on several projects throughout the year and earned over $600 from five different clients. Each of these clients will send her a 1099-NEC form at the end of the year, showing how much they paid her.

Emily receives the following 1099 forms:

• Client A paid her $1,500.
• Client B paid her $800.
• Client C paid her $2,200.

In total, Emily earned $4,500 from these clients. She will use the 1099 forms to report this income when filing her taxes. Since taxes weren’t taken out of these payments, Emily may also need to pay self-employment tax on this income.

Example 2: Landlord Receiving Rent

John owns a small retail space and rents it out to a local bakery for $1,200 a month. Over the course of the year, the bakery pays him $14,400 in rent. Since this is a business lease, the bakery will send John a 1099-MISC at the end of the year, showing the total rent payments they made.

John uses this information when filing his taxes, and he’ll need to report the $14,400 in rental income.

 Example 3: Investor Receiving Dividends

Samantha invests in stocks and has earned $750 in dividends over the year from her portfolio. Her brokerage firm sends her a 1099-DIV form, showing the total dividends she received. She uses this information to report her investment income to the IRS when she files her tax return.

Samantha also earned $300 in interest from her savings account. Her bank sends her a 1099-INT, reporting the interest income she earned. She needs to report both the dividend and interest income to the IRS, as these are taxable.

IRS Form 1099 Types

There are different types of 1099 forms, but the most common one is the 1099-NEC (Non-Employee Compensation), which is used to report payments made to outsourced professionals and freelancers. Other types, like the 1099-MISC, report things like rent, prizes, or legal settlements.

1. 1099-NEC. This form is for freelance compensation paid to freelancers, gig workers, and outsourced professionals. But the amount has to be $600 or more. You must file it before January 31 to both the IRS and the contractor whether by paper or electronically.
2. 1099-MISC. This form is for other incomes like rent, over $10 in royalties, and other payments.The deadline for 1099-MISC submission to the IRS is February 28 for paper submissions and March 31 for electronic filings.
3. 1099-A. Reports acquisition or abandonment of secured property, like foreclosures or short sales.
4. 1099-B. Reports proceeds from broker and barter exchange transactions, like stock sales.
5. 1099-C. Reports cancellation of debt agreements with lenders.
6. 1099-DIV. Reports dividends and distributions from investments.
7. 1099-G. Reports certain government payments, like unemployment compensation or state tax refunds.
8. 1099-INT. Reports interest income, like savings account interest.
9. 1099-K. Reports payment card and third-party network transactions, like credit card payments for online businesses (thresholds apply).
10. 1099-LTC. Reports long-term care and accelerated death benefits.
11. 1099-OID. Reports original issue discount on bonds or certificates of deposit.

What Information Does the 1099 Contain?

Each 1099 form contains key details about the payment, such as:

• The payer’s information. This is the name and address of the business or person who paid you.
• Your information. This includes your name, address, and Taxpayer Identification Number (TIN), which could be your Social Security Number (SSN) or Employer Identification Number (EIN).
• The amount paid. The total amount of money you were paid during the year is listed. For example, if a client paid you $2,500 for a project, that’s the number that will appear on the form.
• The type of payment. The form indicates whether the payment was for services, rent, interest, or something else.

What Happens After You Receive a 1099?

Once you receive a 1099 form, you should keep it with your other tax documents. You’ll need the information on the form when filing your taxes, as it shows income that wasn’t subject to regular paycheck deductions like social security and medicare.

If you receive a 1099 and don’t report the income, the IRS will still know about it since the person or company who paid you also sent a copy to the IRS. Failure to send the report can lead to penalties or audits if the IRS finds that you underreported your income.

Penalties for Failing to Provide a 1099 Form on Time

I consulted with Shem H. Odhiambo, a financial expert with corporate controller experience, to learn more about the consequences of failing to enter the correct data on Form 1099. Shem warns: incorrect data not only puts you at risk for IRS scrutiny, but it can also lead to significant delays in getting refunds or resolving issues. Besides:

Filing taxes can get complicated if you rely on incorrect data, especially when dealing with 1099 forms. Some of the challenges that can arise include:

• Tax Discrepancies: Using the wrong numbers will cause discrepancies between your records and what the IRS has. If that happens, your return will get flagged for review or even an audit.
• Interest and Penalties: Inputting the wrong information to underreport income will get you additional taxes, penalties and interest on unpaid taxes due.
• Amended Returns: Fixing mistakes means filing an amended return which not only takes extra time but also delays any refunds you’re waiting on.
• Communication with Payers: You’ll have to contact the payer(employer) who issued the bad 1099 to get a corrected one. This can be a headache and may not be a quick fix.
• Record-Keeping Issues:When the numbers don’t match it messes up your financial records, making it harder to track income and expenses. This can cause ongoing problems down the line.

Hence, file your taxes without skipping and on time. But do not guess up figures just to fill the forms as these could also lead to errors and potential penalties.

Remember, if you don't receive IRS Form 1099 from your client (short term employer), confirm that they submitted it to the IRS on time to avoid any penalties.

IRS Forms W-9 vs. 1099 

As much as W-9 and 1099 work together for freelancers, there are still noticeable differences as shown in the table below. 

You require W-9 and 1099 forms for tax reporting. W-9 gives businesses your taxpayer information, like your Social Security Number (SSN) or Employer Identification Number (EIN) so they can report payments correctly. 1099 records income from freelance work, like freelancing, for the IRS and the recipient. Filling out these forms correctly and on time helps avoid penalties and ensures that you file taxes properly.

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