The IRS is deadly serious about collecting taxes, which means it must be able to unambiguously identify taxpayers. Although they serve different purposes, Forms W-9 and 1099 are linked by Taxpayer Identification Number (TIN), an identifier used by the IRS to collect taxes.
Form W-9 is used by payers to obtain your TIN so that they can properly report the payments they make to you. Form 1099 is a category of information returns that payers use to report income earned by taxpayers, as identified by their TINs.
Types of TINs
A TIN can be one of several identifiers. For individual citizens, a Social Security number (SSN) serves as a TIN. If you don’t have an SSN, you can apply for one using Form SS-5. If you don’t qualify for an SSN because you aren’t a U.S. citizen, you can instead request an Individual Taxpayer Identification Number (ITIN) using Form W-7. For most others, including self-employed contractors, business owners, limited liability corporations, C and S corporations, partnerships, trusts and estates, the TIN is an Employee Identification Number, which can be requested online from the IRS.
What Is a W-9 Form?
Form W-9, Request for Taxpayer Identification Number and Certification, gathers information about taxpayers including individuals, self-employed contractors, sole proprietorships and corporations. It collects a taxpayer’s name, address and TIN, and identifies the taxpayer type. Generally, Form W-9 is issued by payers that must report income paid to an individual or business. The W-9 issuer sends the form to the taxpayer, who fills it out, certifies the information by signing the form and returns it to the issuer. A Form W-9 issuer might be an employer, broker, financial institution, corporation, governmental entity, real estate investment trust or some other entity that makes payments other than employee compensation. W-9 issuers need to collect your certified TIN because they pay you income during the tax year and must report the payment via an information return like Form 1099 to both you and the IRS. Issuers also need to know whether to backup withhold your payment.
In certain situations, a payer must withhold tax from payments that otherwise would not be subject to withholding. One of the chief reasons why a payer applies backup withholding is because it doesn’t have a payee’s correct TIN. Backup withholding is 24 percent of the payment, which the payer remits to the IRS on your behalf. Payers send out Form W-9 to ensure they have a payee’s correct TIN on file and can, therefore, avoid backup withholding, unless some other reason prevails, such as a payee who previously failed to report dividend or interest income.
Example of W-9 Usage
Imagine an independent contractor who performs work for a corporate employer. At the start of the engagement, the employer collects Form W-9 from the contractor and records the contractor’s TIN. The employer doesn’t withhold income taxes on the payments it makes to the contractor – the contractor makes estimated payments to the IRS instead – and doesn’t apply backup withholding because the TIN is on file. Early next year, the employer will issue copies of Form 1099-MISC to the contractor and to the IRS reporting the income paid to the contractor for the previous year.
What Is Form 1099 Used For?
The different varieties of Form 1099 are a type of informational return, which is a tax document that provides information to a taxpayer. Informational returns are documents that taxpayers use as inputs when preparing their tax returns. In general, Form 1099 reports taxable earnings that the recipient must report to the IRS. A copy of Form 1099 goes to the IRS to help ensure compliance. There are more than a dozen versions of Form 1099, but most are seldom used. The types most commonly seen include:
- Form 1099-INT for interest payments exceeding $10 for the year.
- Form 1099-DIV for dividend payments in excess of $10 from stocks, capital gains distributions or nontaxable distributions.
- Form 1099-MISC for rents, royalties, commissions, fees and payments for work performed by an independent contractor of at least $600.
- Form 1099-B is filed by mutual fund companies and brokers for the sale of securities, reporting the cost basis, sale proceeds and relevant dates.
- Form 1099-K for payment card and third-party network transactions, including payments from PayPal and Google Wallet and from credit card payment processors.
- Form 1099-R for distributions from a qualified retirement plan such as an IRA or 401(k).
- Form 1099-S for proceeds from real estate transactions.
1099 Form for Independent Contractors
A significant number of Americans make some or all of their earnings as non-employees. If you are an independent contractor, the income you earn is usually paid to you without any deductions for taxes or benefits. It is your responsibility to pay taxes on this income, through estimated payments throughout the year and your tax return in the following year. Your customers and clients will issue you Form 1099-MISC if they paid you at least $600 in non-employee income.
Anatomy of Form 1099-MISC
Forms W-9 and 1099 are linked by the recipient’s TIN. Form 1099-MISC include the name and address of the payer and the recipient. The form provides separate boxes for nonemployee compensation, rents, royalties and other income such as income from a hobby. Some of the boxes are rarely used such as ones for fishing boat proceeds, crop insurance proceeds, excess golden parachute payments and gross proceeds paid to an attorney. The form also discloses any federal or state tax withheld, either voluntarily by the employer or due to backup withholding. Some employers offer to withhold income taxes for their non-employees who prefer not to file estimated tax payments.
If the 1099-MISC you receive indicates you’ve earned at least $400 in nonemployee compensation, you must compute your self-employment tax on Schedule SE of Form 1040 and report it on Schedule C. In general, 92.37 percent of your net earnings from self-employment are subject to self-employment tax, consisting of a 12.4 percent tax for Social Security and 2.8 percent tax for Medicare. Half of the self-employment tax you pay is deductible.
Reporting of Dividends and Income
The information gathered by Form W-9, including the TIN, is also used as input to other types of the Form 1099. Dividends are reported on Form 1099-DIV, while Form 1099-INT reports interest. The dividends reported on Form 1099-DIV are divided into qualified and ordinary dividends. Qualified dividends, generally from American companies, are taxed at the long-term capital gains rate that tops out at 20 percent. Ordinary dividends, usually from smaller foreign companies, are taxed like any other ordinary income. Other amounts reported on this form include capital gains distributions from mutual funds and real estate investment trusts, cash received from liquidations and gains on collectibles, which are subject to a special 28 percent tax. Earned interest reported on Form 1099-INT is divided among taxable, tax-exempt and interest from U.S. Savings Bonds. The form also contains information that affects your taxes, such as investment expenses and early withdrawal penalties like those assessed when you cash in a certificate of deposit early.
Reporting Capital Gains and Losses
When you sell property, including stocks, bonds and other capital assets, you pay capital gains tax on any profits. Form 1099-B contains information about the sale of property held both for less than one year (short-term holdings) and at least one year (long-term holdings). Each sale transaction requires a separate 1099-B. The form includes a description of the property, its cost basis and sale proceeds and the dates of the purchase and sale. The form also indicates whether a profit is a short-term capital gain, long-term capital gain or ordinary income. which can occur because of special rules.
Certain other information may be reported regarding complex transactions involving futures, currency contracts or options. Taxpayers transcribe information from Form 1099-B to Form 8949, Sales and Other Dispositions of Capital Assets, where gains and losses are netted together separately for short-term and for long-term holdings. On Schedule D of Form 1040, taxpayers report separately the total short-term total capital gain or loss and the long-term total, and then transcribe the data to Form 1040. Short-term capital gains are taxed as ordinary income, but long-term capital gains benefit from reduced tax rates that top out at 20 percent. Capital losses can reduce ordinary income by up to $3,000 per year, and any excess capital losses can be carried forward to reduce income in future years.
Third Party Network Transactions
Self-employed contractors are sometimes paid through third-party networks such as PayPal, Venmo and Google Wallet. To ensure that nonemployees declare all earnings, the IRS requires these networks to issue Form 1099-K, Payment Card and Third Party Network Transactions, when the paid amount exceeds $20,000 and the number of transactions exceeds 200. Received credit card payments are also reported on this form. The form lists payment totals by month, and separately reports card-not-present transactions. The IRS uses this form to verify your TIN, name and reported income. Taxpayers must be sure to include the income reported on 1099-Ks on their tax returns. Failure to do so will create jeopardy for under-reporting income, risking back-taxes, penalties and interest.
Distributions from Qualified Retirement Plans
Form 1099-R is distributed by retirement plans, profit-sharing plans, IRAs, annuities, pensions, insurance contracts, survivor income benefit plans and other plans that qualify for tax benefits. A copy is sent from each plan that distributed funds to you during the year. The form lists the gross distribution, taxable amount, capital gain, taxes withheld and one or more codes that describe the distribution. These codes tell the IRS whether the distribution was a taxable event, as well as supplying other critical information. In many tax-qualified plans, you receive a tax deduction for contributions and must pay taxes on distributions. These distributions are taxed as ordinary income, not capital gains. Usually, distributions before age 59 ½ are subject to a 10 percent early withdrawal penalty unless you qualify for an exemption.
The IRS waives the penalty if you use the early withdrawal for specific situations such as total disability. If the retirement plan is a Roth plan, the form reports the first year you contributed to the plan. This is an important data item because you must pay a 10-percent penalty if you withdraw any earnings (not contributions) from the Roth plan during the first five years.
Reporting Real Estate Transactions
Form 1099-S, Proceeds from Real Estate Transactions, is an information return reporting the sale or exchange of real estate properties. The form is distributed by the transferor, that is, the person responsible for closing the real estate transaction. Form 1099-S includes the date of closing, the gross proceeds, the address of the property and the buyer’s part of the real estate tax. The form also has boxes for reporting whether the transferor is a foreign person and whether the transferor will receive services or property, other than cash, for participating in the transaction.