Determining work status
The first consideration you need to take into account before sending a client a 1099 is whether they actually require one. This is because you may need to provide evidence that you are paying an independent contractor and not an employee.
While this may sound like an easy distinction to make, when it comes to working with independent contractors who are based in the US, the requirements and specifications that will determine their status aren’t quite as clear-cut as you might think (or would like).
So, let’s begin here.
There are three important questions you need to ask yourself regarding your business relationship with clients to help you ascertain your status:
- Does the contracting company control—or have the right to—what the worker (you) does and how the job is performed?
- Are aspects such as worker payment, expense reimbursement, and equipment supply controlled by you or the contracting company?
- Do you have a written contract and are you privy to employee benefits like a pension plan, insurance, and vacation pay?
These questions will help determine the difference between an employee and an overseas contractor and will therefore result in you requiring a 1099 form or not.
What is the difference between a W9 and a 1099?
The W9 and 1099 are both tax forms that are sent to independent contractors. But while they are connected in terms of forming part of a process, they are designed to accomplish very different things.
What is a W9?
A W-9 form is sent by the client to a contractor in order to obtain their contact information and Tax Identification Number (TIN). This is effectively a preliminary piece of documentation that allows them to complete a 1099 form.
The completion of a W-9 form by a contractor or freelancer is an agreement that they are responsible for withholding taxes from their income. If they were a full-time employee, the employer would withhold some of the income to cover federal taxes, but employers do not make the same withholding for contractors.
What is a 1099?
A 1099 form is used to record non-employment income that is earned by a taxpayer. The term “non-employment” indicates that the individual is not employed by a company, but is instead an independent contractor or freelancer.
This means that very specific types of income can be (and must be) reported that wouldn’t be reported elsewhere.
To put it simply, they keep track of a person’s income in the absence of a wage or salary.
Why would you need to send a 1099?
You must send a 1099 to any independent contractor or freelancer that your agency hires. These are services solicited to unincorporated individuals and businesses where the accumulated total of work is $600 or more.
You will also need to issue a 1099 if you are paying a Limited Liability Company (LLC).
In order to ensure that the name, employer identification, or social security number, address, and tax number are correct, you must send a W9 form beforehand which the contractor is obliged to complete before you pay them. The contracting business will have until January 31 the following year to issue the form.
It is crucial that you send a 1099 in order to avoid either a State or IRS audit and the potential for severe penalties if the information is filed incorrectly or you miss the deadline without a reasonable excuse.
The different varieties of 1099
There are a variety of 20 different 1099 forms—as of 2021—that each serve to represent different types of income earned during a tax year. We are going to focus on the five most used but you can click here to see the full list of 1099 forms.
Form 1099-NEC is the most common form used for the payment of non-employees. This form is now being used instead of 1099-MISC as a declaration that the business has paid a non-employee $600 or more in the tax year.
The non-employee is likely to be an independent contractor or an individual freelancer hired for a specific project or on a contract basis. This would often include graphic designers, writers, and web developers.
Form 1099-INT is required when a taxpayer has earned more than $10 of interest in the tax year. Examples of businesses that would usually send this form include banks, brokerage firms, and different types of investment firms.
Form 1099-DIV would be sent to a taxpayer when dividend income, capital gain distribution or non-taxable distributions are paid on a stock or equity shares. They usually take the form of cash payments from investors to corporations. They are applicable to a value of $10 and up, or on liquidations of $600 or more.
A 1099-G is sent to recipients of money from the federal, state, and local government such as a local tax refund or unemployment benefit.
Form 1099-MISC is typically reserved for income that falls outside of all of the other 1099 forms. It can include some types of non-employment income such as cash prizes and awards.
Do you need to send clients a 1099 Form?
If you are operating an agency and hiring independent contractors or freelancers that are based in the US, you will be obliged to issue them with a 1099 form.
However, there is one very important detail that you need to recognize.
The 1099 form is designed for U.S citizens only, as it requires the submission of a Social Security Number or Tax Identification Number (TIN), via an initial solicitation with a W-9 form. This means that if you are working with offshore independent contractors who are not US citizens, you do not need to issue them with a 1099 form.
In order to ensure that the information regarding the status and domiciliation of your independent offshore contractor is correct, you are highly encouraged to request that they complete a Form W-8BEN which will support your actions of not issuing a Form 1099 in the case that you are audited.
And if you are ever in doubt, your best option is to withhold!
Or alternatively, you can contact our specialist accounting department to help guide you on how to prepare your Form 1099 correctly.