Every individual or entity is required to report specific kinds of earnings to the Internal Revenue Service (IRS) for tax purposes. In order to report the earnings, there are several different methods available for different people and types of earnings. Two of the most popular ones are W9 and 1099. It seems that there are a lot of people who get confused about the differences between W9 vs 1099. These two forms do have some similarities, but there are also fundamental differences that set the two apart.
What Is The W9 Form?
The W9 form is used when an individual or entity is obliged to report certain types of payments to the IRS. You should use the W9 form to give your correct TIN (Tax-payer Identification Number) to the person/entity who is obliged to file an information return to the IRS.
There are several items that are required in the filling out of a W9 form:
– The individual’s or business’s name,
– The appropriate tax classification, for example whether it is a sole proprietorship, a limited liability company (LLC), or a corporation,
– The address,
– The social security number (individual) or the employer identification number (business) or any other relevant tax-payer identification number.
Remember that, once completed, this form is only for the reference of the requesting person. It is not to be filed with the IRS. The W9 form is different from the W2 form (see our previous post about W2 vs 1099 here).
When Should We Use The W9 Form?
To understand the differences between W9 vs 1099, we should first understand when to use the W9 form. So, let’s see how and when to use this form.
The prime items in the W9 form are dividends and earnings from contract works. There are also other examples of earnings that should be reported with the W9 form, such as a real estate transaction, mortgage interest, debt cancellation, acquisition or abandonment of a secured property, and contribution to an IRA. In a case that involves one of those types of payments, the person/entity has to fill out a completed W9 form then submit it to the IRS.
IRS’s official website does provide a detailed guide about how to use the W9 form and when to use it. According to the IRS, you are supposed to use the W9 form to request the TIN of a US person/entity and to request particular certifications and claims for exemption. In addition, withholding agents may need signed W9 forms from the US exempt recipients in order to overcome a presumption of a foreign status. As a note, a US person/entity includes (but is not limited to):
– An individual who is a US citizen or US resident alien,
– A company, corporation, partnership, or association created/organized in the US or under the laws of the US,
– Any estate that is not a foreign estate,
– A domestic trust.
A partnership may require a signed W9 form from its US partners. On the other hand, a PFFI (participating foreign financial institution) should request a W9 form from each holder that is a US person/entity. Meanwhile, foreign persons/entities are supposed to use the Form W8 or Form 8233.
What Is The 1099 Form?
The 1099 form is actually a series of documents which the IRS refers as “information returns”. It is used to report any income other than regular wages. For example, it is used to report self-employment earnings, government payments, interests, and dividends.
There are several different types of the 1099 form which report different types of income.The person/entity that pays you is responsible for filling out the appropriate 1099 form and sending the form to you by January 31.
– Form 1099-DIV is used for dividends and other distributions.
– Form 1099-INT is used for periodic interest payments other than dividends, such as in saving accounts.
– Form 1099-G is used for state income tax refunds and unemployment compensations.
– Form 1099-R is used for withdrawals from a retirement account.
– Form 1099-C is used for debt cancellations.
– Form 1099-MISC is the one that you should use if you are self-employed (i.e. a freelancer) or an independent contractor (i.e. you are a consultant or artist who is hired on a contract basis). To be more specific, this form must be filed for each person with a payment made of:
o At least $600 for services provided by people who are not treated as employees, given for a trade or business,
o Rents, prizes, or awards that aren’t for services (at least $600) and royalties (at least $10),
o Gross proceeds of at least $600 paid to an attorney,
o Any fishing boat proceeds, or
o Withheld federal income tax under the backup withholding rules, regardless of the amount of the payment.
Connection Between W9 vs 1099
Usually, you can request a W9 form from any vendor to whom you expect to pay at least $600 prior to paying them. Doing this as a regular business practice will allow you to collect the vendor’s Tax ID number and mailing information. It will also allow you to know whether the vendor is a corporation or not – you won’t need to provide the Form 1099-MISC to the vendor if they are a corporation.
In the case that the recipient of the payment refuses to give a TIN by filling out a W9 form, the recipient can still receive the payment with the 1099-MISC form. However, the payer must withhold 28% of the payment for federal taxes. This practice is known as “backup withholding”.
A payment on a 1099-MISC form is a taxable income. Backup withholding ensures that the taxes can be paid, even if the IRS doesn’t know exactly who owes the taxes due to the lack of a TIN. The amount of withheld money should be written in Box 4 of the 1099-MISC form.
On the other hand, the W9 form includes a declaration that the individual/organization filling out the form is exempt from backup withholding. So, the W9 form does not require backup withholding.
|- Use to give your correct TIN (Tax-payer Identification Number) to the person/entity obliged to file an information return to the IRS||- Use to report any income other than regular wages|
|- Only for the reference of the requesting person, not to be filed||- Filed to the IRS|
|- Given from the service provider to be filled out by the payer||- Given from the payer to be filled by the service provider|
|- Does not require backup withholding||- Involves backup withholding for federal taxes|
Now, you understand the differences between W9 vs 1099. The W9 form is used to provide a TIN, given from the service provider to the payer who is obliged to file an information return. The W9 form is only used as a reference, and does not require backup withholding. On the other hand, the 1099 form is used to report any income other than regular wages. If you don’t want to provide your TIN, you can ask the payer to give you a 1099-MISC form. However, this method requires backup withholding, as a payment in a 1099-MISC form is considered as a taxable income.