What form does a contractor fill out: A guide

When tax season rolls around, many contractors get jittery about the various forms they need to fill out. However, understanding the forms doesn’t have to be complicated. Whether you’re an independent contractor or a small business owner, knowing the right tax forms to complete is essential to staying compliant with IRS requirements. This simple guide will give you the answer to “What form does a contractor fill out to work?” 

Here, we will cover the most important forms contractors need to know about, including Form 1099-MISC, Form 1099-NEC, and more.

Independent contractors vs. employees: What’s the difference?

Before diving into the forms, let’s clarify an important distinction. If you’re an independent contractor, you’re not considered an employee. This means your clients won’t withhold federal income tax, Social Security, or Medicare taxes from your payments. Instead, you’re responsible for paying these self-employment taxes yourself. These include Social Security and Medicare taxes. These are reported on the tax return using Schedule SE (Self-Employment Tax). As mentioned, unlike employees, building contractors don’t have an employer sharing these costs.

What form does a contractor fill out: The key forms

Form 1099-NEC: Nonemployee Compensation

Form 1099-NEC is one of the most critical forms for independent contractors. Businesses use this form to report payments of $600 or more made to non-employees. If you’re a 1099 contractor, you’ll receive this form by January 31 from each client who paid you $600 or more in the previous year.

The information on Form 1099-NEC includes:

• Your name and address
• Your Taxpayer Identification Number (TIN) or Social Security Number (SSN)
• The amount you were paid for services

Form 1099-MISC: Miscellaneous Income

Form 1099-MISC is another important document, though it’s been used less frequently for independent contractors since the introduction of Form 1099-NEC in 2020. It’s now used for reporting other types of contractor income, such as rent payments, broker fees or royalties from dividends or tax-exempt interest over $10, medical and health care payments, profits from direct consumer goods sales over $5,000, or prize winnings. 

W-9: Request for TIN and certification

Before a client issues you a Form 1099-NEC or 1099-MISC, they’ll likely ask you to fill out Form W-9. This form is used to request the name and TIN of an independent contractor. It could also be the SSN or Employer Identification Number (EIN).

The client who hires the contractor must keep this form filed for up to four years after the engagement with the contractor ends, should the IRS or the contractor come back with questions. Remember, submitting an accurate W-9 ensures your client can correctly report payments to the IRS.

Form W-2: For contractors who are employees

If you are an employee, you’ll receive a Form W-2 instead of a 1099 form. This form shows your wages, tips, and other compensation, as well as the taxes withheld by your employer. Contractors generally don’t receive a W-2, but understanding its purpose can help you distinguish between employee and contractor status.

Form 1099-MISC vs. Form 1099-NEC: The difference 

Both forms are crucial for accurate income reporting to the IRS. The 1099-MISC and 1099-NEC forms each have specific uses in reporting income. The main difference is that non-employee compensation moved from the 1099-MISC to the 1099-NEC after 2020. While the 1099-MISC covers broader categories of income, the 1099-NEC offers a straightforward method to report contractor earnings above $600. 

The 1099-MISC is for miscellaneous earnings such as rent, prizes, royalties, or legal payments. On the other hand, 1099-NEC focuses on non-employee compensation, such as payments to freelancers, independent contractors, and consultants. 

What are the other important documentation and procedures for a contractor?

Contract

Always draw up ironclad written contracts that clearly mention the scope of work, the total costs of the home improvement project, (including materials and labor costs), contractor fees, payment schedules, and if applicable, non-disclosure and confidentiality agreements, intellectual property rights, and more.

Invoices

It is always good business sense to keep invoices documenting when the independent contractor was paid and for what – be it the purchase of materials or for contractor services.

Contractor insurance coverage

While hiring an independent contractor, it is always important to make sure that you have all the necessary insurance coverage required before the project begins, such as General Liability Insurance, Performance Bond, Worker’s Compensation Insurance, Disability Insurance, and more.

Understanding the reporting and filing information returns

If you’re a small business owner hiring contractors, you’re responsible for issuing the appropriate 1099 forms. These forms must be filed with the IRS by January 31. Businesses that file 250 or more information returns must report them electronically through the IRS FIRE System (Filing Information Returns Electronically). 

When you file forms, make sure to include:

• The contractor’s correct name and taxpayer identification number (TIN)
• Payment details
• Your business’s EIN

Remember, failure to file accurately or on time can result in penalties. If a contractor fails to provide their TIN or provides an incorrect TIN, the IRS may require you to withhold 24% of their payments as backup withholding. This amount is sent to the IRS and credited toward the contractor’s federal income tax obligations. Therefore, contractors must ensure the TIN is accurate to avoid unnecessary withholding.

When tax season arrives, use the information from your 1099 forms to complete your tax return. If you’re self-employed, you’ll typically file a Schedule C (Profit or Loss from Business) to report your income and expenses. The net profit from your Schedule C flows into your Form 1040, where you calculate your total federal income tax due.

What are the common mistakes to avoid during tax filing?

• Not reporting all income: Even if you don’t receive a 1099 form for independent contractors, you’re still required to report all income earned.
• Using the wrong TIN: Double-check your forms to ensure your SSN or EIN is correct.
• Missing the January 31 deadline: If you’re a business issuing 1099 forms, missing this deadline can lead to penalties.
• Ignoring backup withhold taxes notices: You need to respond promptly if the IRS notifies you of incorrect TIN information.

Read more: Vital questions to ask when hiring demolition contractors

What are some useful tips for managing contractor forms?

• Keep your records organized: Store all completed W-9 forms and received 1099 forms in one place for easy access when filing taxes.
• Update your information promptly: If your address or TIN changes, provide an updated W-9 to your clients to ensure accurate reporting.
• Verify all information: Double-check your TIN, SSN, and other details before submitting forms to avoid costly mistakes.
• Consult a tax professional: If you’re unsure about your tax situation, don’t hesitate to consult an attorney or accountant to ensure compliance and optimize your tax filings.

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Last thoughts

Independent contractors or 1099 contractors specialize in specific functions, such as plumbing, electric work, or home automation. These small business owners often liaise with others to be part of a team for larger projects. For example, it takes up to 22 contractors to construct a new house.

What’s more, independent contractors are free to do work for multiple clients at the same time, as long as they can stick to their delivery timelines. That is to say, they are not contractually bound to only one project at a time.

If you are an independent contractor, you must stay organized and proactive in ensuring your taxes are filed accurately and on time. Keep track of your income, save your 1099 forms, and don’t hesitate to consult a tax professional if you have questions.

Whether you’re filing Form 1099-NEC, submitting a W-9, or reporting self-employment income on your tax return, these steps will help you stay on top of your financial responsibilities and avoid unnecessary stress during tax season.

Written by Narayan Shrouthy. October 11, 2021

Narayan is a content writer for Kukun. With experience in both content writing and editing, Narayan mixes his writing and love for reading with his passion for music. As an active musician, He aims to be a key player in Kukun's content experience.