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Form W-9
If you've made the determination that the person you're paying is an independent contractor, the first step is to have the contractor complete Form W-9, Request for Taxpayer Identification Number and Certification. This form can be used to request the correct name and taxpayer identification number, or TIN, of the payee. The W-9 should be kept in your files for four years for future reference in case of any questions from the worker or the IRS.
Form 1099-NEC
You must use Form 1099-NEC, Nonemployee Compensation, to report payments made during the tax year totaling or exceeding the reportable payment threshold amount to persons not treated as employees (for example, independent contractors) for services performed for your trade or business. Details about filing Form 1099-NEC, the reportable payment threshold amount, and for information about required electronic filing, are available in the Instructions for Forms 1099-MISC and 1099-NEC PDF (PDF). Generally, don’t use Form 1099-NEC to report wages and other compensation you paid to employees; report these on Form W-2.
Also note that independent contractors may have their own employees or may hire other independent contractors (subcontractors). In either case, they should be aware of their tax responsibilities, including filing and reporting requirements, for these workers.
There are certain situations where a Form 1099-NEC is not required. These exceptions are listed in the Instructions for Forms 1099-MISC and 1099-NEC PDF.
Forms 1099-NEC are required to be e-filed by filers of 10 or more information returns in a calendar year. Information returns may be e-filed directly with the IRS through the:
- Information Returns Intake System (IRIS) taxpayer portal or
- Filing Information Returns Electronically (FIRE) system.
Backup withholding and nonresident alien withholding
Withholding may be required on nonemployee compensation. There are two withholding types for non-wage withholding:
- Non-wage withholding pursuant to Internal Revenue Code (IRC) 3406 (backup withholding) and 3402.
- Withholding of tax on nonresident aliens pursuant to IRC 1441.
You must withhold 24% (backup withholding rate) from reportable payments of nonemployee compensation to U.S. persons (individuals or entities) if the U.S. person has not provided their taxpayer identification number (TIN) in the manner required, or the IRS notifies you that the TIN furnished by the payee is incorrect and the payee does not certify their TIN as required in the notice. Form 945, Annual Return of Withheld Federal Income Tax, must be filed if the payer is required to deduct backup withholding. For more information on Form 945, see Topic no. 307, Backup withholding and Publication 15, (Circular E), Employer's Tax Guide.
Independent personal services (a term commonly used in tax treaties) are personal services performed by an independent nonresident alien contractor as contrasted with those performed by an employee. Payments made to these individuals may be subject to 30% withholding (nonresident alien withholding rate) unless a lower rate is provided by tax treaty or the law. If you cannot determine whether the payee is a foreign person or a U.S. person, the presumption rules require you to treat the payee as a non-exempt U.S. person and deduct backup withholding. Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, must be filed if the payer is required to file Form 1042-S. A Form 1042-S is required even if the tax was not actually withheld. For more information on withholding on payments to nonresident aliens, see NRA withholding, Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, and Publication 901, U.S. Tax Treaties.