You’re not alone if you are confused by the US tax code. It is barely understandable for professionals who deal with tax preparation. However, the reality is that you don’t have to understand the entire tax code to come to grips with your taxes. You only need to know the parts that pertain to you and your business.
With that said, if you are in business for yourself or work as an independent contractor then there are a couple of forms that you should understand. The two most common forms you will need to get familiar with are the W-9 and 1099.
In this article, we will go over these differences so you don’t get your 1099-MISC Form mixed up with any others.
What is a W-9?
Before you can pay your taxes or fill in any of the returns, you need to have yourself set up as a taxpayer. The first step is to get a TIN or Tax Identification Number so you are registered. It could be your social security number, but many businesses and sole proprietors will want a number that they don’t use outside of the business.
Once you have this number then you will need to be issued a W-9 form that collects your personal information that the IRS can then have on file for you. The form will need your name, address, and TIN, and identifies the taxpayer type which means you need to either be an individual, sole proprietor, or company.
It is essentially the same as a W-2 but those are for employees of a company. In this case, the issuer would be the company or business you work for and they will send it off to the IRS. A W-9 won’t come to you by an employer since it is generally used for those in business. In many cases, you will be issued this form by the government or a financial institution.
Example of W-9 use
Imagine that you are an independent contractor and will be working as a barber for a barbershop. Before you start working at the shop you will be issued a W-9 by the shop manager to fill out since a W-2 doesn’t pertain seeing that you are not an employee.
The barbershop is not going to be withholding the taxes from your pay since that is your responsibility. Instead, you will be making estimated payments every quarter. Then, in the next year, you will be issued a 1099-MISC which reports your income to the IRS and you will use it for your tax return.
What Is Form 1099?
As you might have guessed in the last section, the 1099 is a form that is used to report your income from different clients or businesses over the previous year for work performed. It is used by you to be able to fill out your tax return and is also a way to keep you honest since a copy goes to the IRS. There are many different versions of the 1099 so you’ll need to figure out which one is going to pertain to your business.