At the beginning of each year, taxes in the United States become a hot topic. This can be a stressful and challenging time for US businesses, their employees, and the contractors who work with them.
US businesses need to collect tax forms for every person they hire — both inside and outside of the US. Filing taxes with the Internal Revenue Service (IRS) is a process that needs to be completed by mid-April of each year, with many forms and filings needing to be completed within the first month.
The most frequently-used IRS forms that independent contractors may encounter include:
- Form W-9
- Forms W-8BEN and W-8BEN-E
- Form 1099-NEC
- Form 1040
each of which have different versions depending on a range of different variables — such as where the contractor is from, and what type of income they earn. It is companies, however, who are responsible for collecting these forms, and who can be penalized for failure to do so.
When using RemotePass, companies do not need to worry about these tax forms, as they are automatically generated based on a contractor’s location, their tax residency, and they can even be e-signed on the platform so that contractors don’t need to download and sign PDFs.
In this article, we will explore these forms, who needs to complete them, how to complete them, and by when — so that businesses who work with remote contractors have the clarity they need, and to remove much of the stress and frustration from the process of filing US tax forms.
Which Tax Forms Do US Companies Use?
In the US, there are three IRS forms which companies need to collect when working with contractors — for both those from the US and those from elsewhere.
For US contractors, companies have to collect Form W-9 from every contractor they work with before payments are made. This enables companies to prepare Form 1099 which needs to be filed with the IRS to confirm the non-employee income that has been paid to contractors during a financial year.
For contractors who are not US citizens but are being paid by US companies, the company needs to collect the appropriate W-8 form. For those who are contracting as individuals or sole traders, this is Form W-8BEN, and for those who are contracting as an entity, this is W-8BEN-E. These forms help the contractors to claim reductions and exemptions from US taxes on the basis that their tax residency is elsewhere.
In this section, we’ll explore the different forms that contractors need when working for US companies, giving you:
- What each form is and who it’s for,
- An overview of what information the form collects and what it is used for, and
- When it needs to be completed by.
Let’s get started with Form W-9.
What Is Form W-9 for US Contractors
Form W-9 is a form of request that citizen or resident alien contractors of the US need to complete and send to each company that they work with. This applies to contractors operating as a sole trader, but also those operating under an entity.
The W-9 form confirms specific information such as their Social Security number, Taxpayer I.D. Number (TIN) if they are an entity, and their address, which the requestor needs in order to prepare the contractor’s Form 1099.
Form W-9 does not need to be filed with the IRS, but instead it needs to be kept on file by the employer.
There is a responsibility on the part of the company to ensure that they have collected Form W-9s from all of the US-based independent contractors who work with them ahead of the January deadline, so that they can complete the Forms 1099 and return them to the individual.
It is best practice for organizations to request Form W-9 from new contractors as a part of their onboarding process, so that they can keep it on file for the duration of the contractor’s employment with the company.
What Information Does Form W-9 Collect and How Is It used?
Form W-9 is essentially a means of collecting the information needed to create a Form 1099. It requires that the contractor provide a Social Security Number or TIN, and registered address, so that the correct state and federal taxes can be applied.
Form W-9 is not used directly by the IRS, but instead is used to guarantee the collect and organize information entered onto 1099s, which in turn are filed with the IRS.
How to Fill Out Form W-9
Form W-9 is perhaps the most straightforward of the IRS tax forms which we’ll cover in this article. Contractors can download the Form directly from the IRS website and provide their registered address, social security number if they are an individual contractor (TIN if they are working as an entity) and the details of the organization that they are contracting with.
This can then be sent to you, the requestor, who will review the information provided and ensure they have everything they need in order to send their Form 1099 through.
Form W-9 should be completed and returned to every company they have contracted for before the end of January each year. This gives organizations time to prepare the 1099s for them to return before the end of the tax year in April.
What Are the W-8BEN and W-8BEN-E Forms?
The W-8BEN and W-8BEN-E are two types of IRS form which are used by foreign independent contractors and businesses to verify their country of tax residence, and therefore to claim deductions or exemptions from United States’ taxes.
This is because in the U.S., there is an automatic 30% withholding tax applied to various types of income, including:
- Interest payments
- Compensation for services rendered.
However, for contractors who work remotely for U.S. companies, but who aren’t citizens or resident aliens of the United States, the W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting) and the W-8BEN-E (which has the same title) help them claim deductions or exemptions from U.S. taxes. These are especially useful when the contractor’s country of residence has a tax treaty with the United States, as this means that they are exempt from U.S. taxes altogether.
Form W-8BEN for Non US-Resident Individual Contractors
The W-8BEN is a form which individuals who contract for US-based companies complete in order to confirm their tax residency to the IRS and, as a result, to claim reductions of, or an exemption from, the 30% withholding tax that would otherwise be applied to the income they have earned.
The W-8BEN must be submitted to the payer prior to receiving income or credits from them. If individuals fail to submit a Form W-8BEN then they could be liable for either the backup withholding rate under section 3406 or the full 30% rate.
What Information Does Form W-8BEN Collect and How Is It Used?
Form W-8BEN collects details of the independent contractor including:
- Country of citizenship
- Country of residence
- Foreign taxpayer number
- Date of birth, and
- Details of a ‘tax treaty benefits’ claim
The latter is specifically to acknowledge that the individuals’ country of tax residence has a tax treaty with the United States.
This information is used by the employer to validate whether reductions or exemptions from the 30% withholding tax is applicable.
How to Fill Out the W-8BEN Form
You can download Form W-8BEN directly from the IRS here. A W-8BEN form is valid from the date it is signed, until the last day of the third succeeding calendar year, unless circumstances change that render the form invalid.
W-8BEN-E For Non US-Resident Entity Contractors
Form W-8BEN-E is a variant of Form W-8, which applies specifically to nonresident alien (NRA) contractors who are working as an entity, rather than as a sole trader. Like the W-8BEN, Form W-8BEN-E helps contractor entities to claim a reduction or exemption from the US withholding tax placed on contractors owing to foreign tax residence.
What Information Does Form W-8BEN-E Collect and How Is It Used?
The W-8BEN-E collects details of the foreign entity, including:
- The name of the organization that is the beneficial owner
- Country of incorporation or organization
- Chapter 3 status
- Chapter 4 (FATCA) status, and
- Permanent residence address
This information helps the IRS to classify the organization correctly, and to calculate whether an exemption or reduction in US taxes applies.
How to Fill Out the W-8BEN-E Form
You can download Form W-8BEN-E directly from the IRS here. Much like the W-8BEN, a Form W-8BEN-E is valid from the date it is signed, until the last day of the third succeeding calendar year, unless circumstances change.
Forms 1099 and 1099-NEC
1099 forms are a collection of tax forms which are used to provide information to the IRS about all of the income an individual has received throughout the year aside from their regular salary.
1099s record the different types of payments made to an individual by any individual or business who isn’t typically their employer. The payer is responsible for filling out the 1099 and sending it to US-resident taxpayers.
The different types of 1099 forms include:
- 1099-MISC — For rents, royalties, prizes, and other fixed determinable income
- 1099-NEC — For non-employee compensation
- 1099-R — For pension or retirement income
- 1099-INT — For interest income
- 1099-DIV — For dividend income
The 1099-NEC is the form that is used to report income paid to independent contractors, and it was launched in 2020 to account for the growing gig economy in the United States.
What Information Does Form 1099 Collect and How Is It Used?
A 1099 form contains a contractor’s Social Security Number or Taxpayer ID Number (TIN) as well as details of the income they have earned — and its type. Receiving a 1099 does not necessarily mean that they owe taxes to the IRS, instead, it means that the money they have earned has been reported to the IRS as a part of their annual information collecting process. It could be that they have deductions that the income is offset against.
What is the Difference Between Form 1099 and Form W-9?
The primary difference between Form 1099 and Form W-9 is the purpose it serves, and the way it is used. While much of the information on the two forms is the same, form W-9 is sent by a contractor to the payer, while 1099s are completed by the payer and sent to the IRS.
While it’s true that these two forms contain lots of the same information, their purpose and uses are very different. Form W-9 is filled out by the individual contractor (or contractor entity) and sent to the payer (who should request it) in order for them to complete the 109a9. The W-9 is not filed with the IRS, but is instead kept on record at the payer’s organization, and is used to ensure that valid information is entered to the 1099.
The 1099, by contrast, is completed by the payer, and is sent to the individual contractor (or contractor entity) detailing the payments made to them, and the type of income. This form is filed with the IRS to report the payments made to the contractor.
Therefore, the processes surrounding these two forms are intertwined, but their uses are very different.
How to Fill Out Form 1099
You can download Form 1099-MISC here, and Form 1099-NEC here. A 1099 must be issued to contractors and sent to the IRS by 31 January each year.
Form 1040 is considered the “master tax return” which must be completed by US taxpayers every year — whether they are employed or working as contractors. There are four variations of the form.
The four types of Form 1040 are:
- Form 1040: For the majority of US taxpayers
- Form 1040-SR: For senior taxpayers (over the age of 65)
- Form 1040-NR: For nonresident alien individuals, estates, and trusts who have earned US source income and is required to file a tax return. These individuals don’t always owe taxes, but a return must still be filed.
- Form 1040-X: For those who need to make changes to their tax filing
What Information Does Form 1040 Collect and How Is It Used?
When compared with the other forms we have mentioned in this article, the Form 1040 is more detailed, and provides an overview of some of the forms we’ve discussed.
A Form 1040 collects the following information:
- Filing Status
- Social security number
- Standard deductions
- Details of dependents
- A breakdown of income (referencing Form W-2)
- A breakdown of tax and credits.
- A breakdown of payments made to (referencing Form 1099), AND
- Details of any tax refunds or tax owed.
Essentially, this is one of the most detailed forms that the IRS uses to collect information on US taxpayers for the purposes of calculating whether additional taxes are due, or whether tax refunds are owed.
What is the difference between Form 1040 and Form 1099-NEC?
The key difference between Form 1040 and Form 1099 is what they are used for. Form 1040 is the tax return containing multiple details about income, whereas Form 1099 reports only one source of income. All taxpayers complete a 1040, whereas Form 1099 is specific to contractors and the details are used as inputs on the Form 1040.
What’s more, reporting from 1099 will be included on a 1040 return, as there is a section to include details on non-employee income, specifically referencing Form 1099. Therefore, 1040 is a far broader view of an individual’s income and tax situation, whereas 1099 is far more specific.
How to fill out Form 1040
You can fill out Form 1040 here. If you file your taxes based on the calendar year, and your tax year concludes on December 31st, then you have until April 15 of each year to file your Form 1040. If you file your taxes based on the fiscal year, and your tax year ends on the last day of any month other than December, then you have until the 15th day of the fourth month after your tax year closes.
Automate US Tax Forms With RemotePass
As you can see, the process of filing tax forms with the IRS can be complicated. And for companies who are working with global workforces, spread throughout the US and internationally, there can be a lot to consider.
Thankfully, using RemotePass automates this process entirely. We create the relevant forms for contractors automatically based on their location, enable them to sign them on the platform using an e-signature, and return them to the company in a timely manner so that all IRS filings can be completed in accordance with the necessary deadlines.
Book a free demo today to find out more.