The payments are all accounted for. The forms have been filed. Tax season is done. So…
The details of the IRS form—along with Form W-9—are becoming increasingly important as Americans turn to contract-based work in record numbers. News sites and industry blogs are riddled with tax tips for workers who embrace freelancing—what to deduct, how to report income, when to pay self-employment tax. But what about the businesses that hire these at-will vendors?
Looking around, we noticed a shortage of readily available tax compliance tips for the companies that contract out a lot of work. In this post, we’ll take another look at the tax compliance side of this trend, but from the employer’s point of view.
The Rise of the Freelance Economy
The trend has been given a variety of names in recent years: the “gig economy,” “on-demand economy,” “freelance nation” and, most recently, “1099 economy.”
The latter represents the form that businesses, nonprofits and government agencies have to file with the IRS any time they pay someone $600 or more a year in nonemployee compensation. 1099 filings are a key indicator of the state of the freelance workforce.
Precisely how many Americans are foregoing steady paychecks for gig-based businesses is hazy—reports on this vary—but there’s conclusive evidence that contract work is on the rise. Intuit predicts that more than 40% of the American workforce will be freelancing by 2020. As of March 2016, 15 million people in the U.S. were self employed, according to the Bureau of Labor Statistics.
In BloombergView, business reporter Justin Fox showed evidence of the steep rise of 1099s since 2010 compared with W-2s, which employers use to report salaries and wages for full-time employees:
From a business perspective, the benefits of project-based work relationships are many. Contract employees benefit from more freedom and flexibility to work where and when they want. Employers paying vendors by the job or hour save on office space, equipment, insurance and paid time off.
However, the steep increases in contract work are also ushering in a new era of tax compliance complexities. The company that fails to thoroughly and accurately document the correct compliance documentation will face steep penalties and fines under audit—and the more contractors employed, the greater the risk of missing an important form.
The W-9 Side of the 1099 Economy
In the United States, every employer is legally obligated to withhold appropriate taxes when paying vendors, including independent contractors and non-U.S. residents. Failure to do so in a timely and accurate manner can lead to increased tax liabilities, penalties and fines. With companies using more contractors than ever, the demands for accurate and thorough compliance documentation are elevated.
In fact, according to a report from the Roosevelt Institute and the Kauffman Foundation, the American economy as it stands today will be “scarcely recognizable” by 2040.
As we veer from the traditional work model, the report’s creators told Fast Company, the government will end up losing major payroll taxes. This will no doubt create challenges for our public fiscal system as jobs wane—at least until some “very significant policy adaptations” are made.
While we can’t know how tax law will adapt in the near future, we do know that properly validating and storing W-9 forms will remain a critical component of compliance. This form certifies a vendor is registered with the IRS and is not subject to backup withholding, and provides businesses with the right Taxpayer Identification Number (TIN) for 1099 reporting.
For companies that work with a limited number of vendors, handling a few of these forms each year may be manageable. But companies that regularly work with countless contractors on project after project may face increased risks of missed or overlooked forms when it comes time to load, print and submit hundreds of them.
As more Americans trade steady income for on-demand jobs, the freelance economy is here to stay. For employers, this means increased responsibilities for federal withholdings and reporting. Just as companies continue to increase the use of temporary or contract employees, Form W-9 collection responsibilities continue to grow.
If you’d like more information on how to navigate (and automate) this increasingly complex side of Form W-9, download this white paper: The Rise of Contractors & the Impact for Employers.
Visit VendorCapture to see how to automate the management of of Forms W-9 & W-8.