1099-irs-auditorOne of the many benefits of using contractors instead of employees is that there’s much less paperwork involved. Although you only need to obtain a few pieces of information from your contractors, it’s very important that you do so. If you fail to get contractor information right away, it can become an extremely time-consuming process later on.

Form 1099-MISC Reporting Requirements

As a business owner, you’re obligated to send Form 1099-MISC to any sole proprietors, S corporations, and partnerships that you paid more than $600 over the course of the tax year. One copy of the form is sent to the contractor, who reports the proceeds as business income on his tax return. The second copy is sent to the IRS so they can match the income with the recipient.

To complete a Form 1099-MISC, you need to know the contractor’s name, street address and tax identification number. A best practice is to ask all contractors to complete a Form W-9, Request for Taxpayer Identification Number and Certification, before they complete any work for you. A completed W-9 isn’t required by the IRS, but it gives you all the information you need to complete a 1099 at the end of the year.

Sometimes, one or two contractors slip through the cracks. In this situation, you need to call, email or send a letter to the contractor to track down his identification information. If the contractor information you have for the contractor is outdated – or if the contractor wants to avoid having his income reported to the IRS – you may not get a response from him.

What Happens if You Can’t Get Identification Information

If you can’t get a full name, address or social security number for a contractor, you’re still obligated to send a Form 1099. After making a formal request for identification information, complete the Form 1099 to the best of your ability, leaving any missing information blank. Maintain documentation that proves that you requested the information – if you fail to make a formal request, the IRS can penalize you for filing an incorrect informational return.

If the taxpayer identification number is missing or incorrect, the IRS will most likely send you a backup withholding notice. This notice mandates that you withhold taxes from any future payments to that specific contractor. That means, if you want to use the contractor again, you’ll have to withhold 28 percent of his wages for the benefit of the federal government and complete Form 945 at the end of the year.

Even if you’re ready to swear off the contractor, you still need to take action. Along with the backup withholding notice, the IRS will send you a second copy, labelled as notice “B.” You’re required to send notice B to the contractor, along with a blank Form W-9 for the contractor to complete, within 15 days of receiving it from the IRS.

Rules for backup withholding can be complex, so consult a tax expert or IRS literature if you’re in a sticky situation. The IRS publishes a detailed guide that explains your specific obligations and liability regarding backup withholding.