What is 1099? and Why is it Required?

IRS Form 1099 for Non-Employment Income

The 1099 form is like a heads-up to the IRS about money you've made outside of a traditional job. If you're a U.S. taxpayer (other than a corporation) and you've pulled in $600 or more in a year without being an employee, you should expect to see this form. 

It helps the IRS keep tabs on your income through self-employment or other non-employment sources. 

And a friendly reminder: not sending out a 1099 form when you're supposed to could lead to pesky penalties.

Which payments would trigger a Form 1099 filing requirement for a Corporation?

If your U.S. Corporation paid at least $600 for:

  • Rents.
  • Prizes and awards.
  • Other income payments.
  • Medical and health care payments.
  • Any cash paid to an individual, partnership, or estate.
  • Payments to an attorney.

What information does the IRS need for this filing?

  • Payer Information: Your Company name, address and phone number, your taxpayer information number (either your Social Security Number or Employer Identification Number)
  • Payee information: You'll need the recipient's taxpayer identification number, name, address and phone number

Which forms does a Corporation need to collect from contractors? (W-9 and W-8s)

To make sure the IRS is in the loop about your independent contractor getting taxable income from your business, you need to find out where they're paying their taxes. To get this right and report accurately to the IRS, your business should ask the contractor to fill out a Form W-9 or Form W-8. This way, you're all set to keep things transparent and compliant. 

Instructions to fill a Form W-9

Complete points 1-7 on the form:

Step 1

Enter your name.

Ensure your full legal name is as shown on your tax return.

Step 2

Enter your business name.

Write or type your business name or disregarded entity name.

Choose your federal tax classification. 

Step 3

For federal tax classification purposes, please indicate the type of business entity you are by checking the appropriate box. 

✅ If you are a Corporation

Check the box for Corporation.

✅ If you are an Individual, Sole proprietorship, or Single-member limited liability company (LLC) owned by an individual and disregarded for U.S. federal tax purposes.

Check box for Individual/sole proprietor or single-member LLC.

If you are an LLC treated as a partnership for U.S. federal tax purposes; an LLC that has filed Form 8832 or 2553 to be taxed as a corporation or an LLC that is disregarded as an entity separate from its owner but the owner is another LLC that is not disregarded for U.S. federal tax purposes

Check the box for Limited liability company and enter the appropriate tax classification

(P= Partnership; C= C corporation; or S= S corporation).

✅ Partnership

Check the box for Partnership

✅ Trust/estate

Check the box for Trust/estate.

Step 4

Note: Choose your exemptions. Please provide the appropriate payee or reporting code if you believe you are exempt from backup withholding or reporting requirements under the Foreign Account Tax Compliance Act (FATCA). Certain corporations may be exempt from backup withholding for payments like interest and dividends, but for more information, please refer to the official instructions provided at the end of the form.

Step 5

Enter your street address. Write or type the complete street address that you use on your tax return, including the number, street name, and apartment or suite number. This could be your home or business address.

Step 6

Enter the rest of your address. Write or type your city, state, and zip code. Including your address on the W-9 allows the IRS to match your 1099 forms with your 1040 form and keep track of your tax information.

Step 7

Provide the requester's information. Next, input the complete name and address of the individual or organization that has requested you to complete this form. Although this step is not mandatory, it can be beneficial to record this information for future purposes.

Exemptions

  • Individuals (including sole proprietors) are generally not exempt from backup withholding.
  • Corporations are exempt from backup withholding for certain payments, such as interest and dividends.
  • Corporations are not exempt from backup withholding for payments made in settlement of payment card or third-party network transactions.
  • Corporations are not exempt from backup withholding for attorneys' fees or gross proceeds paid to attorneys.
  • Corporations that provide medical or health care services are not exempt from backup withholding for payments reportable on Form 1099-MISC.

W-8 BEN or W-8 BEN-E

What is Form W-8 BEN or W-8 BEN-E?

The W-8 BEN is like the international cousin of the W-9, tailored for individual contractors from outside the U.S. Think of it as a way for foreign individuals to clarify their tax status when they earn some income in the States. 

If you're dealing with a non-US business contractor, they must hand over a Form W-8 BEN-E instead. Remember, you don't need to file a 1099 for these international contractors, but do keep their W-8 BEN or W-8 BEN-E forms safe for about seven years. It's your backup to show why you didn't withhold taxes for them.

Instructions to fill a Form W-8 BEN (for foreign individuals)

The purpose of the form is to establish:

  • The individual is the beneficial owner of the income connected to Form W-8BEN.
  • The individual is foreign and not a U.S. citizen/ or other U.S. party.
  • The individual's qualification for a lower tax rate deduction or complete exemption is based on an income tax treaty between their native country and the United States.

Here is how you can fill out a W-8 BEN form:

Part I

  1. Legal Name: Enter your full legal name as it appears on your tax return.
  2. Current Citizenship: Indicate your current citizenship.
  3. Permanent Address: Provide your permanent address.
  4. Mailing Address: If you prefer to receive documents at a different address than your permanent address, you can provide a mailing address.
  5. U.S. Taxpayer Identification Number: Leave this blank if you are a non-U.S. person or foreigner without a Social Security Number (SSN).
  6. Foreign Tax Identifying Number: If applicable, enter your Foreign Tax Identifying Number issued by your country of residence. For example, Indian nationals should enter their PAN (Permanent Account Number). If you do not have a Foreign Tax Identifying Number, you should explain instead of leaving it blank (e.g., "N.A.").
  7. Reference Number: This is optional for individuals. If you are a sole proprietorship or partnership, refer to the instructions provided here.
  8. Date Of Birth: Provide your date of birth.

Part II

  1. Treaty Claim: Enter the country of residence here. Certain countries have income tax treaties with the U.S., which may allow you to claim reduced tax withholding rates. You can find the list of countries here.
  2. Special Rates And Conditions: Use line 10 only if you are claiming treaty benefits that require additional conditions not covered in line 9 and Part III. For example, if the treaty contains different withholding rates for different types of royalties or if you are an international student or researcher claiming treaty benefits. Refer to the instructions for more information.

Part III

  1. Certification & Verification: Sign and date Form W-8BEN in the format MM-DD-YYYY. The form should be signed and dated by the money owner, the account holder at a Foreign Financial Institution (FFI), or someone with legal authority.

    If an agent is completing the form on behalf of the person, they should include a duly authorised power of attorney or a copy that allows them to complete, sign, and present the form. Form 2848 can be used for this purpose. The agent should also check the box indicating their authority to sign for the owner.

Instructions to fill a Form W-8 BEN-E (for foreign businesses)

Part I – Identification of Beneficial Owner

This section is super important on the W-8BEN-E form. Make sure to fill it out right and complete it before you hand it in. Take your time here to make sure you have filled in all the information in the right place.

Step 1 -  Name of the Organization: Enter the foreign business' name.

Step 2 -  Country of Incorporation: Enter the country of the business' tax residency.

Step 3 -  Name of a Disregarded Entity: This section is completed only when someone other than the foreign entity receives payment. If payment is not directly made to the foreign business and goes through foreign or U.S. sources, such as an accounting institution, then this section should not be skipped.

If there is a third party involved, Part II should also be completed. This section asks for more information about the Disregarded Entity or Branch Receiving Payment.

Step 4 -  Chapter 3 Status: The majority of foreign businesses that are doing business fall under "Corporation" or "Partnership" status. 

Other options include: Foreign government/Simple trust (grantor and complex, too)/Central Bank of Issue/Tax-exempt organization/Private foundation/Estate/International organization

Step 5 - Chapter 4 Status (FATCA Status): If the foreign business is an Active Non-Financial Foreign Entity, you can opt for NEFE on the form. Usually, if none of the other categories fit your company type, you should select Active NFFE as the option.

Step 6 - The parts of the W8BEN-E form you complete later depend on your FATCA (Foreign Account Tax Compliance Act) status. If your company isn't a Foreign Financial Institution (FFI) such as a bank, insurance, or investment fund, you can skip all the sections related to FFI.

Step 7 - Permanent Residence Address: This is the foreign business' registered address.

Step 8 - Mailing Address: You can skip this section if both Mailing and Permanent addresses are identical.

Step 9 - Tax Identification Information (foreign TIN): Since most non-US businesses won't have a U.S. Tax identification number, you can enter your company's local tax identification number (as per the business' tax filings).

Part II – Disregarded Entity or Branch Receiving Payment

If there is a third party, Part II will need to be filled out as well. This section asks you to elaborate on the Disregarded Entity or Branch Receiving Payment. This includes:

Step 10 - Chapter 4 status: Check the box that applies to your business. If no box applies to the disregarded entity, you do not need to complete this part.

Step 11 - Address (no P.O. box): Enter the address of the branch or disregarded entity.

Step 12 - GIIN (if any): If you are a reporting Model 1 FFI, reporting Model 2 FFI, or participating FFI, you must enter the GIIN on line 13 of your branch that receives the payment. If you are a disregarded entity that completed Part I, line 3 of this form and are accepting payments associated with this form, enter your GIIN. Refrain from entering your GIIN on line 9.

Part III – Claim of Tax Treaty Benefits

This is for Chapter 3 purposes only. In this section, you should check the appropriate boxes and fill in the country of origin.

Step 13 - a: If you're asking for a lower tax rate or no tax withholding according to an income tax treaty, write down the country where you live for tax treaty reasons and check the box to confirm your residency in that country.

b: Check the box that applies to your entity.

**Part XXV – Active NFFE (**Non-Financial Foreign Entity)

In this section of the form, you must select checkbox 39 to confirm that:

  • The entity described in Part I is a foreign entity that is neither a bank nor a financial institution.
  • Less than half (50%) of the total income for the previous calendar year comes from passive sources.
  • Less than half (50%) of the assets held are for generating or produced from passive income (calculated as a weighted average percentage of quarterly passive assets).

Part XXX – Certification

You need to accurately enter your business Name and the date the form was signed.

How to file Form 1099 on Inkle?

Step 1 - Request Inkle Support: Request Inkle Support to launch "W Series and Form 1099" on your Filings page. (Inkle pricing is $100 up to 3 free filings, $20 per additional filing.)

Step 2 - Inkle's Bookkeepers Do the Math: Inkle's bookkeepers will analyze your statements and create a list of vendors you need W-Forms from.

Step 3 - Add Vendor Emails: You enter the email addresses of the vendors and can send an email request to the W-Forms.

Step 4 - Inkle Contacts Vendors: Inkle sends your vendors an automated email cc'ing you with a link to fill out their tax info.

Step 5 - Watch the Magic Happen: Once your vendors answer the questions, Inkle automatically generates W-Forms and uploads them to your Inkle 1099 Filing.

Step 6 - Effortless Form 1099 Filing: Based on the collected W-9 forms, Inkle will file your Form 1099s.

1099 vs. W-2 Tax Forms

The key difference between 1099 and W-2 tax forms boils down to the type of information they report:

The 1099 form is all about tracking payments to independent contractors without detailing any tax deductions.

On the flip side, the W-2 form offers a full breakdown of an employee's taxable earnings, including deductions for federal and state income taxes, Social Security and Medicare contributions under the Federal Insurance Contributions Act (FICA), and any reductions for things like 401(k) contributions and certain benefits. It also covers perks such as health insurance, life insurance, and dependent care assistance.

Basically, you'd use a W-2 form for employees and a 1099 for freelancers or independent contractors. It's vital for a business to get this classification right to file the appropriate forms.

Hiring independent contractors might seem more budget-friendly since it can save on employment taxes, benefits, and admin costs. But remember, a company can't just decide on its own whether someone is an employee or a contractor; it's about how much control the company has over the "what, when, and how" of the work being done. The IRS has specific criteria to help figure out someone's work status.

Independent contractors, or self-employed people, usually have more freedom in setting their schedules and methods and supplying their tools. However, they also carry the business risks of making or losing money on their work.

Who Is a 1099 Worker?

A 1099 worker, often known as an independent contractor, is an individual worker who provides services to a business under a contractual arrangement. 

Correctly classifying workers is crucial for businesses, and while seeking advice from an H.R. advisor or legal counsel is recommended for accurate classification, here are some examples of workers who might receive a 1099 form:

  1. A consultant engaged for a specific duration to complete a project.
  2. A freelance web developer working on a per-assignment basis, using their equipment.
  3. An electrician contracted multiple times yearly to address power outages in an office building.

When To Issue a 1099?

Employers should issue a 1099 form to individuals or businesses that provide services but are not business employees. Independent contractors are often employed when projects or assignments have defined start and end times; there is no guarantee of continuous work, no set working hours, or the work can be carried out without direct supervision.

When Should 1099s Be Sent Out?

Per IRS guidelines, employers are obligated to issue a 1099 to independent contractors/workers who earned more than $600 in non-employment compensation by January 31 of the following year. Form 1099-NEC is distributed to the worker or business providing services and the IRS.

What Is a W-2 Tax Form?

The W-2 tax form is an annual information return issued to employees by their employer. It details taxable wages, income tax withholding, and Social Security & Medicare tax withholding. 

Additionally, the form outlines various employee benefits, some taxable and some tax-free, and includes information on state income tax withholding. Businesses are required to file a W-2 for each employee, irrespective of the total compensation paid throughout the year.

What Is a W-2 Employee?

In tax terms, a W-2 employee is compensated through their employer's payroll, with payroll taxes deducted throughout the year. By January 31, the W-2 employee receives the Form W-2, which encompasses details regarding taxable compensation, tax withholdings, and potential deductions related to employee benefits like employer-sponsored health coverage or contributions to 401(k) plans. 

W-2 employees utilise this information to complete their annual tax filings. 

Examples of employees who typically receive a Form W-2 include:

  1. An office worker with set hours, ongoing tasks, company-provided equipment, and direct supervision.
  2. A warehouse supervisor with scheduled weekly hours and periodic training sessions.
  3. An administrative assistant is required to be in the office from 9 am to 5 pm, with defined responsibilities and health insurance through an employer-sponsored medical plan.

When To Issue a W-2 Form

Employers are obligated to issue a Form W-2 to every employee who received payment during the year and had specific taxes withheld from their paychecks. Determining employee status versus independent contractor status depends on the nature and circumstances of the working relationship, as outlined in the IRS tests mentioned earlier. 

Generally, having W-2 employees implies ongoing work, the use of company-provided equipment, set working hours, and direct managerial oversight.

When Should W-2s Be Sent Out?

As per IRS guidelines, employers must provide a Form W-2 to every employee who worked for them in a given year by January 31 of the subsequent year. This deadline also applies to submitting copies of W-2s to the Social Security Administration (SSA).

Is it possible for an Individual to Receive Both a W-2 and a 1099?

Sometimes, a person might end up with both a 1099 and a W-2. Imagine someone who wears two hats at the same company: they're both working as an employee and getting a paycheck, but they also sit on the board of directors, earning separate fees for that role. In this case, they'd get a W-2 for their day-to-day job earnings and a 1099 for the money they make as a board member.

Or consider someone who starts the year freelancing for a company and then halfway through, they get hired as a full-time employee. They'd receive a 1099 form for their freelance work and a W-2 for their employee salary.

It's super important for companies to be careful when they switch someone's status from contractor to employee or the other way around. This is especially true if the person keeps doing the same kind of work, even though their job title or employment status changes.

The Importance of Accurate Worker Classification for Employers with the IRS

It is crucial for small businesses to accurately classify their workers, as misclassifying an employee as an independent contractor can lead to significant consequences. The repercussions include the repayment of wages and employment taxes, substantial penalties, and potential liability for unpaid employee benefits, such as health coverage and retirement plan contributions.

The IRS imposes escalating penalties for unpaid employment taxes resulting from worker misclassification, typically covering a retrospective period of three years. 

In the case of failing to file a required Form W-2 in 2023, penalties range from $50 per form (if filed within 30 days post the due date) to $290 per form (if filed after August 1), with potential annual adjustments for inflation.

Additional penalties include:

  1. Failure to withhold wages: 1.5% of wages, plus interest.
  2. Employee's share of FICA: 40%.
  3. Employer's share of FICA: 100%.
  4. Failure to pay tax: 0.5% of the unpaid tax liability per month (up to 25 percent of the total tax liability).

If the IRS suspects fraudulent or intentional misclassification to evade employment taxes, penalties may escalate to 20 percent of wages paid, encompassing both the employee and employer shares of FICA. 

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