As an employer hiring independent contractors, like construction workers, you need specific tax forms that differ from those given to full-time employees. The forms needed for 1099 workers include W-9 and 1099.  

Both forms provide the employer and employee with the correct tax files to ensure compliance with Internal Revenue Services (IRS) regulations. The main difference between the forms is in who files the form and what financial documentation is provided. 

Understanding the difference between these forms will help make sure you’re ready for tax season. 

Who Files a W-9?   

The independent contractor you’ve hired provides IRS W-9 form before beginning services. Since the form does not vary once the information has been reviewed for accuracy, it is simple for independent contractors to quickly share with multiple employers. There’s no need to change the form based on employer details. 

It contains information such as:

• Full name
• Employee Identification Number (EIN)
• Address
• Taxpayer Identification Number (TIN) or SSN

Employer best practice is to ask for the W9 form before the onset of employment. 

Who Files 1099?

The employer provides an IRS 1099 form to the taxpaying independent contractor. This document contains income documentation that the hired employee must provide on his or her annual tax returns. 

This form is sent to IRS and to each hired 1099 employee. 

How do W-9 forms and 1099 Forms Work Together?

A 1099 independent contractor hired to install the flooring of a marketing company’s office building will send the W9 form to the marketing company that includes the EIN number prior to beginning the installation. Then, the marketing company uses the information provided on the W9 report to put together the 1099 tax income file. 

The W9 form is necessary for the employer to correctly complete the 1099 form. It is considered best practice for employers to use the information provided on the W9 as it is illegal for an independent contractor to file false information on a W9 form. 

The purpose of the W9 form is to provide the employer with proof of independent contractor status. Whereas, the 1099 form provides IRS with information regarding the job performed. 

If the marketing agency pays the independent contractor $5,000 for their services, that same amount should be on their 1099 tax filings, as well as on the independent contractor’s filings. In order to verify your tax filings, IRS will cross-reference these records.

On the other hand, W-2 employees do not submit W-9 forms to their employers. They fill out an I-9 upon employment. W-2 employees must pay payroll taxes, and Federal and state taxes are withheld from their paychecks. Additionally, workers’ compensation insurance is paid for W-2 employees while 1099 employees are self-insured. 

Who Receives W9 and 1099 Forms?

Independent contractors should provide W9 forms to the employer, but they do not need to be submitted to IRS annually. However, 1099 forms are required submission to IRS and state tax authorities.

According to IRS, filing 1099 forms are required if the employer has paid anyone:

• “At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest. 
• At least $600 in:
  • Rents.
  • Prizes and awards.
  • Other income payments. 
  • Medical and health care payments. 
  • Crop insurance proceeds. 
  • Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish.
  • Generally, the cash is paid from a notional principal contract to an individual, partnership, or estate. 
  • Any fishing boat proceeds
• Report direct sales of at least $5000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.” 

Worker Misclassification 

Misclassifying workers and employees can lead to a variety of fines and penalties. IRS can uncover a misclassification when you file the forms above. So, how do you know if you misclassified your employees? 

What is the difference between a 1099 independent contractor and a W2 employee?

Business owners can employ a person as either a 1099 worker (independent contractor) or a W2 employee.  They cannot be both simultaneously. Although one person cannot be both a W-2 and 1099 for a business, a business owner can have various W-2 employees and 1099 workers simultaneously. 

A way to distinguish between a 1099 and a W-2 is by understanding who has the right of control. There are three elements to help you classify your workers: 

• Behavioral Control: Are you in charge of the manner in which workers perform their duty?
• Financial Control: Do you pay regular wages and have the ability to fire the employee?
• Relationship to business: Is the employee an essential part of helping your business run? 

Answering yes to any of these questions means this person should be classified as a W-2 employee.

1099 Workers

A 1099 worker receives a form 1099 and has an independent business separate from the hiring company’s business. 1099 workers:

• Can work for multiple employers
• Can set their own hours
• Must have their own insurance
• Can provide their own equipment
• Are paid a set fee
• Do not receive employee benefits. 

The scope of work is negotiated with the hiring company, and their partnership with the employer is on a per-project basis. Keep in mind that 1099 workers pay their own taxes. 

W-2 Employees

Employees generally receive a W2 from each employer who reports their gross wages and tax withholding to the federal and state tax agencies. Their employer provides the equipment to work with, receives benefits, and is employed on an ongoing basis. 

Each state has its own rules when it comes to classifying employees. California recently enacted a new law known as AB5 (or the ABC test) that has 3 elements to determine if a worker is an employee or a 1099 contractor.  Not all states have enacted the same ABC test.  Some states follow the common-law test.

What is the ABC Test?

On January 1st, 2020 Assembly Bill 5 (AB-5) put into place new worker classification standards for employers. Under AB-5, the ABC test lists the three criteria a worker must meet in order to be classified as a 1099 independent contractor. If they miss even one criterion, they must be classified as a W-2 employee. 

The three criteria under the ABC Test include: 

1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
2. The worker performs work that is outside the usual course of the hiring entity’s business; and
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Want to learn what triggered these stricter classification regulations? Read more in our article about how Dynamex ruined it for everybody here.