Wait, what's a W9 and who needs one?

Congratulations!!! Your business has made it to 2022!. Before you start planning the next goals that you’re going to CRUSH, there is a bit of housekeeping to take care of…

You’ve likely sent a few payments this year. Would any of them be considered an “independent contractor”? If so, you’ll have to report those payments to the government.

Typically, an independent contractor is someone you pay to perform services for your business, but who is not an employee. (We’ll discuss the differences between an employee and an independent contractor in another post.) You must send a 1099 to anyone that you pay $600 or more during the year and they are not incorporated. The 1099 looks a lot like the W2 an employee receives from their employer. It serves the same purpose – reporting their earnings to the government so they have to pay taxes on that money.

Whenever you hire an employee, they fill out a W4, which provides you with all the information you need to send them their W2 after the end of the year. You must collect the same information from independent contractors as well and you do this with a W9.

Who do I have to issue a 1099 to?
If you issue payments of $600 or more to the following:
Services performed by independent contractors or others (not employees of your business)
Prizes and awards and certain other payments
Rent
Royalties
Backup withholding or federal income tax withheld
Gross proceeds of $600 or more paid to an attorney – even if incorporated

If you paid someone who is not incorporated (except for attorneys – they all get one), you will issue a 1099. If they are an LLC or a Partnership, these can either be taxed as a sole proprietorship or as an S Corp. This is why you have them fill out the W9 form – they tell YOU how they are taxed.

One exception to this rule is if you paid your independent contractor via credit card or PayPal, you do not have to send a 1099 for those payments because they are reported separately to the government by the credit card company/PayPal. You just need to track what you pay by other means – even if you barter for services.

When do I ask for the W9 form?
It is best to request a business’ W9 before you pay them the first time. It is a very common business practice so don’t feel uncomfortable asking. I highly suggest getting one from every business at the beginning of every new engagement because they might not reach the $600 mark until the end of the year and chasing folks for forms is no fun for anyone.

What do I do with the W9s once I have them?
Once you start collecting the W9s from your vendors,you keep them safe. I recommend designating a binder to file them in alphabetically and also scanning them in to file online in a secure location. You need to keep them for at least 3 years from the last 1099 issue date. This is how long the IRS has to begin an audit and request your tax records. If no information changes about the vendor (such as address or tax ID) then you can continue to use the same W9 year after year.I highly suggest keeping all W9s for 3 years minimum, even if you don’t issue the vendor a 1099. This is your proof for the government that this is the information you were given by the vendor.

If you have any additional questions, please reach out or check out: https://www.irs.gov/

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