When you work as an independent contractor, receive interest or dividend income, or receive monetary compensation from a variety of other sources, you may be asked to complete an IRS form W-9. Just after year-end, you then receive a Form 1099 that discloses the amount of compensation paid to you. The person or company paying you generates the 1099 and sends a copy of it to the IRS. When tax time arrives, you must include this compensation in your taxable income on your tax return.
What’s a W-9?
Form W-9, Request for Taxpayer Identification Number and Certification, helps the IRS gather information on vendors hired as independent contract workers or freelancers. Whenever a company pays $600 or more to an independent contractor within a 12-month period, the IRS requires it to report these payments. Additionally, when receiving interest or dividend income, or monetary compensation from various other sources, you may also need to complete a Form W-9.
Form W-9 vs. Form 1099
The W-9 form is a counterpart to Form 1099 and provides a business with the receiving taxpayer’s name, address, Social Security number and other necessary details for use in tracking payments and generating the year-end 1099s. The IRS has created several 1099 variants, also known as information returns. The most commonly used form, 1099-MISC, covers miscellaneous payments to vendors such as freelancers.
The IRS has 16 different 1099 forms to cover different types of taxpayer income. For example, the 1099-INT shows the amount of interest paid to you on an investment or bank account. The 1099-R shows income received as a distribution from annuities, pensions, profit-sharing plans and similar retirement vehicles. If you received dividends, expect to receive a 1099-DIV, and if you have any type of debt canceled, the IRS requires the party canceling the debt to file a 1099-C in your name.
Calculating the Tax
You won’t be able to calculate the tax on a W-9 form because it won't contain any earnings information; you must wait to receive the corresponding 1099 at the end of the year. The 1099 form discloses the amount of income you must include on your tax return. Because 16 different types of 1099 forms exist to report various types of income, each income type may have its own important and differing details when it comes to calculating the tax due.
The most common version, 1099-MISC, shows income from independent contractor work. You calculate the tax on this income by including the income on the IRS Schedule C, Profit and Loss from Business. The Schedule C allows you to also include any expenses that offset your income so you only pay taxes on the remaining amount or net income. You then include this remainder on line 12 of your regular 1040 tax return and use the tax tables to figure out the taxes due. You also need to include the net income on Schedule SE to calculate your self-employment tax due.
When 1099s Get Lost in the Mail
Whenever you receive a Form 1099, you can rest assured that the IRS has also received a copy. Companies must mail 1099 forms to taxpayers by January 31 each year, although they have until the end of February to send their 1099s to the IRS. If you have not received an expected 1099 by the time you file your tax return, you can file an amended return later in the year with the additional income from the late 1099 form.
What Does the IRS Show?
In some cases, especially if you have changed addresses, you may have several different companies providing you with 1099 forms. If you question whether you have received all your 1099s, you can request a transcript of your taxpayer account from the IRS. This transcript shows all activity on your taxpayer account including all the 1099 forms received by the IRS and attached to your Social Security number for the given tax year.