Dreaming of making zero mistakes when tax season arrives?
Ah yes… Figuring out how to keep contractors and employees organized for tax season is a headache. So many different forms. So many deadlines. Dozens of different rules you have to follow.
If you get it wrong, the penalties from the IRS can be steep.
Fortunately, when you have a process in place, filing those electronic tax forms for contractors and employees is pretty easy. Let’s walk through how to make it happen.
In This Guide:
- Why You Should Care About Contractor and Employee Tax Filing
- Determining Whether Workers Are Contractors or Employees
- A Step-by-Step Guide to Filing Electronic Tax Forms
- Mistakes to Avoid During Tax Season With Contractors and Employees
Why You Should Care About Contractor and Employee Tax Filing
Asking why you should care is fair. Taxes aren’t optional. But did you know?
If you pay anyone for services rendered, you’re legally required to report those payments to the IRS. The on-time and accurate way.
Fail to do so, and you’ll quickly rack up penalties from the IRS. 1099s filed late incur penalties from $50 to $290 per form, depending on when they’re turned in. Filed intentionally late? $660 per form.
But wait, there’s more…
Incorrectly classifying someone as an independent contractor who should be an employee can also cost you dearly. Potential back taxes, interest on those taxes, payment of benefits and even lawsuits. The National Employment Law Project estimates that between 10% and 30% of employers are misclassifying workers currently.
That’s tens of millions of Americans.
No one wants to deal with that.
One of the best ways to prevent misclassification and make sure you get your taxes done right is by using an electronic tax form filing system. The right software, like 1099-etc desktop software, makes it easy by allowing you to do your W-2 and 1099 form preparation, filing and printing all from one place.
Helpful, huh?
Determining Whether Workers Are Contractors or Employees
Before jumping into the actual mechanics of filling out and filing electronic tax forms for contractors and employees, there’s one more important step.
Every worker needs to be classified as either an employee or a contractor before the filing process even begins.
Failure to classify workers will lead to disaster when tax season comes.
How do you know who is who?
The IRS has put together a few rules to determine if someone is a contractor or an employee. Remember these three:
- Behavioral: Does the company control how and when the worker completes their tasks?
- Financial: Does the company control the financial aspects of the job? (Method of payment, expenses, etc.)
- Type of relationship: Is there a contract stating the worker will perform duties in exchange for payment? Are there benefits? Will this relationship continue indefinitely?
If you answered yes to most of those questions, that worker is most likely an employee. Employees get W-2 tax forms. Contractors get 1099-NEC forms.
A Step-by-Step Guide to Filing Electronic Tax Forms
All right. You’ve classified your workers properly. You know who gets a W-2 and who gets a 1099. It’s time to get into the details of tax season preparation.
Step 1: Gather Correct Information Ahead of Time
Don’t wait until January to start collecting this information. Any contractor you plan to pay needs to fill out a W-9 form ahead of time. Any employees should have a W-4 form already filled out and on file.
This information includes:
- Full legal name
- Taxpayer Identification Number (or SSN)
- Business structure (only for contractors)
- Address information
Having this information readily available ahead of time will save you headaches later.
Step 2: Keep Records of Payments Made All Year
This is where your books come into play. Make sure you have detailed records of every payment made to contractors and employees.
Remember…
For contractors, any payment of $600 or more requires you to file a 1099-NEC form. For employees, you must file a W-2 with the wages paid and taxes withheld.
Consider using payroll services or accounting software that tracks this information for you automatically. Reduces the chances of human error and makes your life easier come tax time.
Step 3: Verify Tax Identification Numbers Before Filing
Here’s one most people forget to do…
Double-check tax identification numbers before you file with the IRS. They offer a TIN matching service for businesses to verify this information. If you file a form with incorrect TINs, you may receive a backup withholding notice and potential fines.
Save yourself the headache and verify TINs before filing.
Step 4: File Electronically Before the Deadline
Tax form filing is moving increasingly electronic. The IRS noted that almost 96% of returns were e-filed during tax season in 2025. Filing electronically is much easier than doing so by paper. Reduce your chance of error by filing electronically.
When is the deadline? Well, that depends on which form you’re filing.
- January 31 – File 1099-NEC forms with the IRS and furnish a copy to the contractor
- January 31 – Furnish W-2 forms to employees
- February 28 – File paper returns for 1099 forms, if any
- March 31 – File electronic returns for 1099 forms
Missing any of these deadlines will result in automatic fines. Mark your calendar and set reminders a few weeks before they’re due.
Step 5: Retain Copies of All Filed Documents
Once you’ve filed everything away, make sure you keep copies of your records. The IRS recommends keeping tax records for a minimum of three years.
Keeping them for 7 years is the safest approach.
Mistakes to Avoid During Tax Season With Contractors and Employees
Of course, even the most diligent business can make mistakes. But there are a few common ones that are easily avoidable.
Procrastinating. This is the biggest mistake of them all. Businesses that wait until January or February to start gathering W-9s and verifying information are already way behind the curve. Begin collecting tax information at least two months before you need to file.
Filing Incorrect Forms. Remember… 1099-NEC forms are for contractors. If you paid someone rent, borrowed money, or awarded them royalties file a 1099-MISC form. Don’t get these two mixed up.
Ignoring State Requirements. Some states have additional filing requirements or need copies of your 1099s and W-2s on top of what you send to the IRS. Always check your state’s department of revenue for more information.
Not Filing Electronically. All businesses filing over 10 information returns are now required to file those returns electronically with the IRS. Even if your business doesn’t fall into that category, filing electronically is much faster and helps eliminate errors.
Wrapping Up
Tax season doesn’t have to be stressful or daunting if you keep contractors and employees organized year-round.
Let’s review:
- Determine if your workers are contractors or employees.
- Collect W-9 and W-4 forms from contractors and employees before making any payments.
- Keep detailed records of any payments made to employees and contractors throughout the year.
- Verify TIN numbers before filing with the IRS.
- File your taxes electronically before the deadline and keep copies of everything.
Businesses that do this will experience zero penalties, remain IRS compliant and stress less about tax season every year.
