Tax forms every business needs for hiring contractors
Looking at hiring contractors but you arenโt sure what you need? Check out our breakdown of tax forms every business needs for hiring contractors.
The last several years have seen a drastic spike both in the number of independent contractors and the amount of businesses hiring them. This rush to bring in freelance labor, however, carries the risk of misclassification โ incorrectly classifying your new workers as contractors or employees when they are, in fact, the other โ which carries significant penalties.
Business owners navigating these waters need to make sure they are filing the correct forms. However, this becomes significantly more difficult as you dive deeper into the weeds. Thatโs why our team made the flowchart presented here; the remainder of this article breaks it down further and explains what tax forms every business needs for hiring contractors.
Tax forms every business needs for hiring contractors in the U.S.
A contractorโs operating location is the first of several considerations when determining what tax forms you will need for them. All U.S.-based contractors will require a W-9 form and some form of 1099.
Contractor Type | Forms to Collect | Forms to Issue | IRS Filing |
---|---|---|---|
US Contractor | W-9 | 1099 (relevant variant) | 1096 (paper only) |
To collect: W-9
A W-9 form is collected by the company at or before the time of hire, but it should be collected at least by the time of the first payment.
This form certifies the contractorโs Taxpayer Identification Number (TIN) or Social Security Number (SSN).
W-9 collection typically follows a standard procedure:
- The employer sends a digital PDF for the contractor to fill out or has them fill out a physical copy
- The contractor sends the filled copy to the employer
- The employer and contractor keep a copy in their records
W-9s do NOT need to be filed with the IRS; simply keep a copy handy in the event of an audit.
To issue: 1099
Form 1099 is the companyโs account of all income made from independent contracting services. The most commonly used form for independent contractors is the 1099-NEC. However, there are several variants of Form 1099, a few of which may also apply:
Common 1099 Variants for Independent Contractors
1099 Form | Purpose |
---|---|
Form 1099-NEC | Payments to independent contractors (the primary form for 1099 workers) |
Form 1099-MISC | Miscellaneous income (e.g., rent, prizes, royalties) |
Form 1099-K | Payments received via third-party platforms (e.g., PayPal, Stripe) |
Form 1099-INT | Interest income (from banks, etc.) |
These forms need to be issued to both the IRS and the contractor prior to January 31, assuming they have made more than $600.
To file with the IRS: Form 1096
Tax Form 1096 is an account of the total 1099s being submitted in a fiscal year, including total amount paid and the total number of forms. It essentially functions as a kind of cover sheet for the IRS, but it is only necessary when submitting paper 1099s; if you plan on e-filing, the 1096 is not necessary.
If you plan on using a 1096, submit it with COPY A of all 1099 forms included on the 1096 by January 31. The address to submit varies depending on where your business is located; use the IRS guide โWhere to file Form 1096โ to determine the correct location.
Tax forms every business needs for hiring contractors internationally
Cross-border hiring carries with it an entirely different set of forms in order to prevent misclassification.
Contrary to domestic hiring, where the form being issued has a large number of variants, however, international hiring places a larger focus on the form being collected from the contractor.
Contractor Type | Forms to Collect | Forms to Issue | IRS Filing |
---|---|---|---|
Foreign (Individual) | W-8BEN | 1042-S | 1042, 945 |
Foreign (Qualifying Individual) | W-8BEN, 8223 | 1042-S | 1042, 945 |
Foreign (Agency) | W-8BEN-E | 1042-S | 1042, 945 |
To collect: W-8BEN
The W-8BEN is the standard form to collect when hiring international contractors. Mirroring the domestically oriented W-9, the W-8BEN certifies that the contractor is a foreign person, documenting relevant tax identification and claim of treaty benefits.
There is one variant of the W-8BEN, the W-8BEN-E, which is used in the event that the foreign entity being contracted is an agency or business operating in another country.
International contractor tax forms depending on partnership
Individual | Agency/Business |
---|---|
W-8BEN | W-8BEN-E |
In certain circumstances, foreign individuals may find themselves doing work within the United States. Until those individuals meet the requirements for theโSubstantial Presence Testโ they may qualify for additional tax exemptions using Form 8233 up to 30% of their income. The standards to qualify for Form 8233 include:
- Have been in the country for >183 days
- Are foreign nationals
- Are working within the United States
Once the contractor meets these standards, they must switch to a W-9. Form 8233 must be submitted by the contractor to the employer along with their W-8BEN, who then sends the form to the IRS within 5 days of receipt (W-8BENs are not sent to the IRS, but the employer keeps a copy for their records).
To issue: Form 1042-S
Form 1042-S acts as the international equivalent of the 1099-NEC for international contractors. These forms document the amount paid, tax withheld, income code, as well as the country of residence. Unlike the 1099-NEC, however, the 1042-S is a singular document with no variants, making this aspect of international hiring significantly easier.
1042-Ss must be filed by March 15 with the IRS.
To file with the IRS: Form 1042
Similar to Form 1096 for domestic contractors, Form 1042 acts as the summary cover sheet for all 1042-Ss filed by the employer within the last year, including:
- Total income
- Amount of tax withheld
- Total # of forms filed
These forms are filed by March 15 with the IRS.
To file with the IRS: Form 945
Form 945 is filed by the employer directly to the IRS to report federal income tax withheld from non-employees. This includes backup and withholding, as long as it has been paid to the IRS over the course of the year.
Form 945 must be filed by January 31 directly with the IRS.
Is there an easier way to do this?
As this article hopefully illuminates, navigating the tax forms every business needs for hiring contractors is difficult. Moreover, the price paid for misclassification is steep – several countries even take IP ownership into account when determining penalties for failure to file or misfiling, meaning that employers stand to lose control over work that they have already paid for.
This is precisely why so many businesses choose to work with an agent-of-record (AOR) provider like Payoneer WFM.
Our teams handle the time-consuming granular work on your behalf, reducing misclassification errors and ensuring that your operations are able to grow smoothly, no matter where you take them.
FAQs
What about foreign nationals living in the US or US citizens working abroad?
Citizenship plays a critical role in determining what tax forms businesses need for hiring contractors, and it gets especially tricky when evaluating that against where they live and how long theyโve lived there.
Foreign nationals, for example, who have lived within the US for 183+ days have met the โSubstantial Presence Testโ, assuming those 183 days fall into one of the three following categories:
- 100% of days in the current year
- 33% of days last year
- 18.5% of days the year before
In these cases, that foreign national would be issued a W-9 instead of the usual W-8BEN. The following table breaks this down a bit more clearly:
Tax forms for hiring contractors based on location & citizenship status
Contractor Type | SPT Met? | Location | Form to Collect |
---|---|---|---|
US Citizen | N/A | Anywhere | W-9 |
Green Card Holder | N/A | Anywhere | W-9 |
Foreign National | Yes | Inside US | W-9 |
Foreign National | No | Inside US | W-8BEN |
Foreign National | N/A | Outside US | W-8BEN |
What about the other forms of 1099s?
Form 1099 has several variants beyond the four discussed in the section above. The table below lists each, including why they typically do not apply for hiring contractors.
1099 Form | Why they donโt apply |
---|---|
1099-DIV | Reports dividends and distributions |
1099-B | Reports income from broker or barter exchanges (stocks, trades) |
1099-R | Reports retirement account distributions |
1099-G | Reports government payments (e.g., unemployment compensation) |
1099-C | Reports canceled debts |
1099-Q | Reports distributions from education savings accounts |
1099-S | Reports proceeds from real estate transactions |
Do I need to file multiple 1099s?
The answer here is complicated. The short answer is โItโs possible, but probably not.โ
A separate 1099 will need to be filed for each individual contract signed with a client. That means that itโs entirely possible to fill out multiple 1099s, even with the same client, for separate jobs worked. It gets more complicated, however, when we look at instances where two 1099s apply for a single payment:
Ex. A writer working for Company A gets paid via Payoneer WFM for his work in March. This would technically qualify him for both 1099-NEC (payment for services rendered) AND form 1099-K (payment via third-party platforms). |
In these instances, the IRS explicitly instructs to avoid duplicate recording. In the above instance, Payoneer WFM would actually need to issue a 1099-K to the contractor, and the 1099-NEC wouldnโt apply since the IRS prioritizes the party that actually routes the money and handles the payment.
This aspect of 1099s gets confusing; a helpful way to think of it is with two filters:
Filter # | 1099 Variant | ||
---|---|---|---|
1. What is the payment being given for? | Contractor Services | Rents, Royalties, Prizes | Interest |
(NEC) | (MISC) | (INT) | |
2. Was I paid directly or via a third party? | Direct – Check, Transfer | 3rd-Party | Brokerage/Wallet |
(Use form from Filter 1) | (K) | (DIV/INT) |
The confusion around 1099 management is one of the primary reasons businesses consider working with contractor management tools; these platforms provide business owners with the tools they need to easily and efficiently classify independent contractors appropriately to avoid misclassification and get operations moving.
What if Iโm not sure if the worker is actually a contractor?
If your worker falls into the โemployeeโ designation, youโll need to file a form W-2 instead of a W-9. The line between contractors and employees is remarkably thin, but you can use provided guides like the IRS 20-point checklist to narrow down your evaluation.
If you are still unsure, however, you can also file a Form SS-8 to request an IRS determination of worker status.
Disclaimer
Nothing herein should be construed as if Payoneer Inc. or its affiliates are soliciting or inviting any person outside the jurisdiction where it operates/is licensed to engage in payment services provided by Payoneer Inc. or its affiliates, unless permitted by applicable laws. Any products/services availability are subject to customerโs eligibility. The availability of this product is not guaranteed and may vary. Not all products/services are available in all jurisdictions in the same manner.
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