In recent years, the IRS has taken steps to better regulate independent contractors by urging business to monitor the proper completion of Forms W-9 received from all of their vendors and utilizing “Best Practices” when filing Forms 1099-MISC.
Many independent contractors or vendors do not properly complete a Form W-9, which is essential to accurately report income earned for the services provided by them as individuals or by their Sole-Proprietorship. Completed W-9s were often not provided to the business where services were provided, and when provided usually contained incorrect identification information such as the tax identification number (TIN).
In order to rectify this problem, the IRS has increased the number of audits they perform on small business owners as well as increased the penalty fee for incorrect 1099-MISC filings.. Going forward, the IRS is also encouraging businesses to file 1099-MISC forms electronically avoid late or inaccurate income reporting
As the responsible party to pay taxes on reportable income, it is critical that the contractor/sole proprietor/vendor avoid making any errors when preparing their W-9. All W-9 forms must include their name and business name (if different, e.g DBA), correct TINs (i.e., Social Security or Employer Identification Numbers), operating address and type of organization. When Social Security numbers (SSNs) or Employee Identification numbers (EINs) do not match the IRS file, (the name listed on the tax return), the IRS doesn’t know which identification to use when comparing data.
In summary, the IRS is cracking down on independent contractors and business owners after receiving years of 1099-MISC forms filed incorrectly. The IRS is performing more audits and issuing higher penalty fees income is reported incorrectly. Contractors must file their annual taxes differently than corporate employees. Contractors should consider filing and paying quarterly tax estimates to avoid penalties and interest for their income tax liabilities. Unlike corporate employees, independent contractors don’t pay taxes out of each payment received, they pay at year-end. If you have any questions or concerns about tax reporting for independent contractors, please contact us.