Why You Should Collect W-9 Forms from Contractors Throughout the Year, Not in January
Collecting W-9 forms from your contractors as soon as you sign a letter of engagement or contract is a smart business practice. Waiting until January, when the 1099 filing deadline is approaching, can cause stress and lead to errors. In this blog, we’ll explain why collecting W-9 forms early is important, how the form helps you determine if a 1099 is needed, and who qualifies as a 1099 contractor.
Who Doesn’t Need to Receive a Form 1099-NEC or 1099-MISC?
When reading a W-9, the first thing to check is whether the contractor is exempt from receiving a 1099. Generally, C corporations, S corporations, and LLCs formed as corporations or S corporations don’t need to receive a 1099-NEC or 1099-MISC. This means if your contractor’s W-9 shows that they are incorporated, and you’re not paying for medical or legal services, a 1099 is not required.
Exceptions: When a 1099 Is Still Required
There are some exceptions where you will still need to file a 1099, even if the contractor’s business is incorporated:
Medical and legal services: Payments to corporations for medical or legal services always require a 1099.
For more detailed guidance, you can refer to the IRS page on 1099 requirements here.
Why Collect W-9s Early?
Collecting W-9s early ensures that you have the correct information to decide if you need to issue a 1099. Doing this upfront gives you several advantages:
Less Stress: You avoid the last-minute scramble in January when the filing deadline is looming.
Time for Review: You can send 1099s to contractors in early January, giving them a chance to review their information before you file with the IRS.
Avoid Errors: Early collection of W-9s helps prevent mistakes when filing your 1099s.
Who Needs a W-9? Categories of 1099 Contractors
Any independent contractor who provides services to your business and earns $600 or more during the tax year typically requires a W-9. Common types of 1099 contractors include:
Subcontractors: Those hired for construction, repairs, or specific projects.
Lawyers: Legal services always require a 1099, even if paid through a firm.
Landlords: If your business rents office space from an individual, you’ll need to issue a 1099-MISC for rent payments.
Freelancers: Writers, graphic designers, consultants, and others who work as independent contractors.
If you’re unsure about contractor classifications, check out my blog on Independent Contractor Classification.
Safeguarding W-9 Information
Since W-9 forms include sensitive information like Social Security Numbers and Taxpayer Identification Numbers, it’s important to safeguard them. The IRS has specific guidelines on protecting this data, which you can review here.
Conclusion
In summary, collecting W-9s throughout the year helps you stay compliant, reduces stress, and ensures that both you and your contractors have adequate time to handle any corrections before the 1099 deadline. Implementing this best practice will save you time, prevent potential errors, and maintain positive working relationships with your contractors.