Freelancers and others in the gig economy are treated as small businesses by the IRS. Income is reported on Form 1099-MISC, which is submitted to the IRS by January 31 of the year after the money was paid. The 1099 tells the IRS that money was paid, making it important for recording both income and expenses. In general, you must give a 1099-MISC form to anyone who receives more than $600 from you in a year.
In order to file a 1099-MISC, anyone paying you needs to request your Social Security number or Employer ID Number. They’ll do this on Form W9. If you are paying someone more than $600 and they are not incorporated (or if you are not sure), send them a W9. (Some companies even post their W9s on their website; you can see one from Pitney Bowes here). They will return the form to you, and you will keep it on file until you need to send out a 1099-MISC at the end of the year.
Related: Managing the Challenges of Estimated Taxes as an Entrepreneur
Those who pay you will ask for a W9, too, Although the requester of a W9 is obligated to protect the information on it, you may not want your Social Security number floating around. The IRS has an alternative called an Employer Identification Number, or EIN. There is no charge for it, and you do not need to have employees to receive one. It has the same number of digits as a Social Security number, but it will not tie to your bank accounts. Consider this a big step in making your business appear more substantial.
Likewise, if a contractor balks at sending in a W9 with a Social Security number on it, send them the EIN information. You’ll be doing a favor to keep the gig economy working.
When you pay a contractor or service provider, you don’t have to take out any tax, but you do need to keep good records. By January 31, both the IRS and your contractor should receive the form. An accountant can prepare the 1099-MISC forms for you, or you can do it through most tax filing software packages. You can even fill it out by hand and mail it in.
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From the perspective of the IRS, every expense you take represents income to someone else. If everyone does their taxes correctly, all of the income and all of the expenses of all of the business owners in the country should match up. Of course, forms get lost in the mail and the 1099-MISC filing requirement sometimes gets overlooked. If you have a legitimate expense that you can document, you should take it from your taxes. Likewise, if you receive income, you should report it on your taxes. You may not receive a copy of 1099-MISC, but there’s a chance that the client sent it to the IRS but forget to send it to you.
Collecting W9 forms is a way that taxes are a year-round concern for even the smallest of business owners. If you know the rules, though, it doesn’t need to be stressful.
