If you hire contractors to provide services to your new business (or if you, yourself provide contract services to a client), then you’ll likely need to use IRS Forms W9 and 1099.

What this means is that you’ll either have to file 1099s with the IRS to report payments made to a contractor for services (or, if you are the contractor, your client is likely to ask you for a W9). These forms will be a requirement in (most) service-for-payment situations, but they are not required in traditional employee-employer relationships.

WHY DO WE HAVE W9S AND 1099S?

As you probably know, when a business pays employees the business must withhold portions of the employee’s paycheck for tax purposes and then remit the withholdings (along with additional payments from the business) to the government. These payments cover the employee’s income taxes and also employment taxes such as social security and Medicare.

However, when a business pays independent contractors, that doesn’t happen. Rather, it’s the contractor’s responsibility to report and pay their own taxes. As a result, if a business pays a contractor and neither party tells the IRS, then it’s possible that the contractor won’t pay their taxes on that income. Further, the IRS won’t even know about the transaction, so they won’t be able to seek payment of those taxes.

THAT’S WHY WE HAVE W9S AND 1099S

The purpose of W9s and 1099s is to make sure the IRS knows about payments for services and, thus, is able to collect taxes owed from those payments. Clients must file the 1099 to inform the IRS of the payment (if it is over $600 in one year); and the contractor must give the client a W9 so that the client can complete the 1099 and file it with the IRS.

HOW TO USE W9S

If you are a contractor, you may be asked to provide a W9 to your client. Conversely, if you are hiring a contractor, then you should always ask your contractor to give you a W9 before you pay them for their services. (Technically, they are only required when a contractor is paid more than $600 in one year for services, but it is usually a good idea to request them when you start paying a contract just to keep your records straight.)

The form itself is pretty simple. It includes certain information about the contractor such as the contractor’s name, address, and most importantly, their EIN or SSN. It is only one page and doesn’t take long to complete.

HOW TO USE 1099S

Generally speaking, the requirement to complete and file 1099s falls on the client, not the contractor. In this case, the business hiring the contractor must complete a 1099 for each contractor which it pays more than $600 in one year. The forms are due shortly after the close of each tax year and a copy must be delivered to both the contractor and also the IRS.

Provided the business has the contractor’s W9 it should be easy to complete because the main information in the 1099 is the contractor’s identifying info and how much the contractor was paid.

Luckily, you can do this online and there are multiple online service providers that can help you manage the process for a reasonable fee. And as always, you can hire an accountant or CPA to help you manage these filings.

HOW TO MAKE A PLAN AND STAY COMPLIANT

Writing a business plan and starting a business takes a lot of work. To help, make sure you think about these IRS forms when you are getting started so you can  get off on the right track. In short, if you plan to hire contractors to provide services to your business, plan on requesting their W9s and schedule time at the start of each year to file the previous year’s 1099s. And if you are the contractor, be sure to have a fully completed W9 in your files so you can give it to your client when they ask.

To learn more about starting a new business, check out the Kauffman FastTrac program.  It offers free online courses to learn how to write your business plan, start your business, and remain compliant with many different government requirements.

CONTRIBUTOR: Chris Brown, Venture Legal