Understanding US Tax Reporting for Independent Contractors
Immediately following the festive yearend holidays and new year celebrations is tax season. As we reflect on the past year, we also prepare to report its financial impact on our personal and business tax returns. The nature of tax season, beginning January 1st, can be full of angst for both companies and workers as each reporting status comes with its own stack of federal and state forms and fast approaching deadlines.
Independent contractors, consultants, gig workers, and other self-employed workers, along with the businesses that pay them, follow a different process for tax reporting than traditional W-2 employees and employers. It is crucial to have a clear understanding of tax reporting requirements if you are an independent contractor or the company paying for their services.
When a company pays a contract worker $600 or more during a tax year, the US Internal Revenue Service (IRS) requires the company to report these payments to the IRS. Each independent contractor must complete IRS Form W-9 to provide a Tax Identification Number (TIN) and Certification.
Information collected in Form W-9 is used by the company to generate another tax document — Form 1099-NEC (nonemployee compensation). The IRS refers to Form 1099-NEC documentation as an information return and it is used by the contractor to report earnings and file an income tax return with the US government. The information such as name, address, social security number (SSN), and TIN that a contractor provides in Form W-9 is used by the company to complete and distribute a 1099-NEC to each contractor earning over the $600 earning threshold. The company must distribute the 1099s by January 31st.
Getting Familiar with Form W-9
Form W-9 is the most straightforward IRS form to complete for independent contractors.
When completing Form W-9, it is key for contractors to use the same information that they use to file their personal or business tax return. This ensures companies can issue accurate information returns on 1099s, and the IRS can easily identify the contractor and their income.
- Form W-9 is an official form furnished by the IRS for companies, employers, or other entities to verify the name, address, and tax identification number of an individual receiving income.
- For accuracy, independent contractors should use the same information they plan to use when filing their personal or business tax return.
- Form W-9 needs to be completed by the contractor and returned to the company by December 31st of the current tax year.
- The information collected on Form W-9 is often used to generate a 1099 tax form, which is required for income tax filing purposes.
- The information collected by an entity on Form W-9 cannot be disclosed for any other purpose, under strict privacy regulations.
What to Expect from 1099 Tax Reporting?
In 2020, the IRS introduced the new Form 1099-NEC to specifically report non-employee compensation, currently defined as payments to non-W-2 payroll employees. Individuals such as independent contractors, direct selling distributors, consultants, gig workers, affiliates, and other self-employed workers should expect to receive a 1099-NEC (instead of a W-2 form) to report their income to the IRS on their tax return.
The deadline for companies to file Copy A of Form 1099-NEC with the IRS is January 31st of the following year. If this date does not fall on a business day, the due date will be the next business day. Similarly, the deadline to provide Copy B of Form 1099-NEC to contractors is also January 31st of the following year. If deadlines are missed, then companies can be subject to IRS fines and penalties.
Changes can take place during the tax year. Many companies and contractors find that corrections may be needed once the 1099 is already filed with the IRS. The corrections can be made by the company, or tax service provider, as needed throughout the year. Payors and payout solution providers, such as PayQuicker, expedite the process and file and distribute 1099s electronically to automate the tedious process of tax reporting.
How PayQuicker Eases the Burden of Tax Season
Businesses that work with independent contractors require a robust payout solution to manage their payments. A key goal is to streamline the payout process so company finance and accounting teams can be more productive where it counts.
The task of collecting, verifying, and distributing tax documentation, and the necessary follow-up is a seasonal drain on most company’s finance and accounting resources. In addition, handling sensitive personal data has its own risks and complexities. The result is a tremendous burden that increases company costs and decreases productivity.
PayQuicker Tax Services relieve the burden of tax season and allow companies to focus on building their business. It also simplifies the process of tax document completion and submission for independent contractors on the platform.
Companies enrolled in PayQuicker Tax Services, as well as individual contractors, can also easily request any needed corrections on 1099 forms by contacting PayQuicker Support.
Top 4 Reasons to Enroll in PayQuicker Tax Services:
- Security — Lower risk of the significant cost of a data breach by allowing PayQuicker to handle sensitive personal data on our secure, audited technology platform
- Compliance — Lower risk of penalties with PayQuicker services configured to meet all regulatory formats and deadlines for document, distribution, and filing
- Productivity — Relieve your accounting team of the seasonal surge of tax related work so your staff can focus on business building activities
- Cost savings — Save time and money with our cost-effective fee schedule and value-added features
Learn more about PayQuicker Tax Services and enroll today.
Terrainna Smith is a Senior Accountant at PayQuicker, where she oversees PayQuicker’s integrated tax services program and more. Terrainna is a Certified Compliance Manager (DSCP-CP, 2021) with nearly 15 years of accounting and finance experience.
PayQuicker is a leading provider of financial technology and innovation for enterprise businesses. Our cloud-based, regulatory-compliant, secure software stack offers custom-branded payout solutions that power clients to seamlessly deliver secure, instant payouts to millions of independent contractors, distributors, gig workers, and affiliates around the globe.