Employee and Contractor Forms

Let’s talk about the various tax forms and returns you may need to prepare.

W-9: When you hire a contractor, request a W9 form from them. You can find these online and send it to the contractor. Do this before you pay them any money. Hold their money hostage until you get it, or they may not give it to you. They are required to give you this form so you can track your payments to them and know that you have the information for the 1099 NEC you will file at year-end. This form tells you what type of company/entity they are for tax purposes and shows their tax id number, as well as their address. Set up your vendor record just as they have everything written on the W9.

You will need to send these out for your company when they are requested, too. You will fill them out exactly as you have your company set up and name with the IRS on your EIN application.

1099 NEC: A common one is the 1099 NEC, which used to be the 1099 MISC. This is for non-employee compensation. If your company has paid someone over $600 during the year for work performed for your business, then you will need to do this one. If the work was for you personally, not for your business, then you don’t send one for that. This is for people who are not actual employees with payroll taxes withheld on each paycheck. Your business prepares it and it is due by Jan. 31 each year. You send in all of your 1099 NECs to the IRS with a transmittal form called 1096 or do it online. This helps the IRS track folk’s income and match it to their return and the income they report. You also send a copy to the person it is for and keep a copy for your business records.

You will need to go over your records to be sure you have only one vendor you’ve paid for this person, not several with different names. For instance, if you have Mike Smith, Mike Smith Contractors, M. Smith as different vendors, then you would need to combine them together to get one total amount you paid him for creating the 1099. I use software that comes with the W2 and 1099 NEC forms that you can buy at Office Depot. It makes it easy to create the 1099’s and print them out or file them online. Some accounting software can also do this, but since I work for several employers, it is easier for me to do all companies with the same software. On the IRS website, you can find instructions for filing 1099 NEC forms and they cover every scenario you might have, so a very valuable resource.

W-2: The W-2 is for actual employees who receive paychecks with taxes withheld on them. Your company or your third-party payroll company prepares these and they are due by Jan. 31 each year. This form has various information on it, but the main ones are gross pay and federal payroll tax withheld. Your employees need this information in order to have their income tax return prepared. You will send these to the Social Security Administration, the employee, and keep one copy for your records. These have a transmittal to send with them called a W-3, or if done online then no transmittal is needed. W2s are not given to contractors, ever. Your payroll software will keep track of all these amounts and you may be able to use it to prepare your W2’s. As mentioned above, I use a separate software to prepare them for multiple companies. And the IRS website has instructions on how to do these on their website.

If you have any special adjustments to payroll for the year, you need to do those before the last payroll of the year, so that your ending totals are complete and correct before preparing the W2s. You may notice that I didn’t say to send these to the IRS. That is because you will have reported your payroll on 941 returns quarterly to the IRS and they don’t need another record of that. Also, the employees send the IRS a copy with their income tax return. It is important to not make any mistakes on these because if you do, then you will have to send in W2Cs to fix the errors and they are not fun to do.

941: These are payroll tax returns that are due quarterly, Jan. 31, Apr. 30, July 31, and Oct. 31. One month after the end of each quarter. You can get these forms and instructions on the IRS website about how to prepare them. They show the number of employees, the gross payroll, federal withholding, the Social Security and Medicare taxes. They also show the amount of payroll taxes you have paid and on what dates. As you may know, when you prepare a payroll check, there is federal withholding deducted based on the employees' W4 they gave you, social security and medicare payroll taxes are deducted too. Your payroll software tracks all these numbers and calculates them for you. The 941 reports all this and is sent to the IRS. You will have records in the software of how much and when you have paid the payroll taxes to the IRS. That will be the federal withholding, social security, and medicare taxes plus the company matches the social security and medicare taxes that were deducted. The IRS will send you a letter telling you whether they want you to pay them these taxes monthly or every week.

Make sure you pay them as required or there will be hell to pay. I’m talking penalties and interest. And the IRS may change the frequency of your payments at any time. They always send a letter to notify you. The IRS will use your 941 to determine if you have paid the correct amount and within the correct time frame. If you don’t play by the rules, expect an actual visit by an IRS agent at your place of business. You can’t say I didn’t warn you!

W-4: I mentioned this in the above 941 section. You will give your new employee a W4 form to fill out when they are hired and before you have run their first payroll check. This is used to determine the amount of federal withholding for income taxes that will be deducted from their paychecks. You will enter this information when you set up the employee in your software, or give it to your third-party payroll provider asap. Employees can change their W4 as often as they want to and should request the form from you to do so. You do have to go by that form; a verbal agreement with the employee is not okay. Also, your employee may not know how to fill out the form, which is why there are pages of instructions that go with it. Be sure to give those to them. You cannot help them with the form because that is considered tax advice and you are not likely to be a tax advisor. This form is kept in the employees' file and not sent to the IRS.

940: This is the form used to report federal unemployment taxes. It is due by Jan. 31 of each year. This one is a little tricky to fill out. This is because the amount is calculated on the first $7000 (in Texas, it may be a different amount in other states) of gross payroll for each employee. Your software will track this for you. There are forms and instructions on the IRS website and you should use them if you are filling out this form yourself. You should periodically check to see how much you owe throughout the year and pay it whenever the accumulated total reaches $500. The IRS doesn’t want you to owe them too much at the end of the year. This form is sent to the IRS.

SUTA: This is the form used to report state unemployment taxes. I believe this is done online only and no paper forms are used anymore. You will need all employees’ names and social security numbers for this one and the amount of gross payroll for the quarter. These are reported quarterly just like the 941’s, due one month after the end of the quarter (see the dates above under 941). You will file these and make the required payment in an online system that your state has. This amount is calculated on the first $9000 (in Texas, it may be a different amount in other states) of gross payroll for each employee.

I-9: This form is for verifying your employee’s identity and employment authorization. You can get this form on the US Citizenship and Immigration Services website. Before starting work for you, you will have your new employees fill out Sec. 1 and give you their identification documents. Following the instructions on the form, you will fill out Sec. 2 and retain this form in their employee files.

Conclusion: So, there you have it. These are all the forms you will need if you have employees and contractors. As I have mentioned in another post, you may want to make a note of these due dates on your calendar so that you can meet these deadlines. Most of these will assess penalties and interest if they are not done timely. You are the responsible party even if you use a third-party payroll provider. Keep an eye on that provider to be sure these deadlines are met. It is your business that will pay the price if they don’t.