IRS Form W-9 is essential for collecting Taxpayer Identification Numbers (TINs) from independent contractors, freelancers, and other nonemployees. Properly managing W-9 forms helps small business owners ensure compliance with IRS regulations and avoid backup withholding penalties. This blog explains the importance of W-9 forms, when to use them, and best practices for securely handling them.
Are you expanding your business and hiring multiple freelancers, independent contractors, or other types of gig workers?
One critical form you’ll need to handle is the IRS Form W-9 to ensure proper tax documentation.
A W-9 Form must be collected at the beginning of their employment period to accurately report their income with a 1099 form at the end of the tax year.
This form is essential for collecting the Taxpayer Identification Number (TINs) of your contractors—whether it’s an Employer Identification Number (EIN) or a Social Security Number (SSN). This information collected through this form is crucial for issuing 1099 forms and ensuring accurate tax reporting to the IRS.
Did you know?
Failing to correctly manage W-9 forms can lead to backup withholding at a rate of 24%? This means that if the IRS requires, you must withhold this percentage from your payments to contractors who haven’t provided a proper Tax Identification Number (TIN).
If you’re one of those contractors, you can expect to receive a 1099 form to report your income.
In this blog, we will break down Form W-9 for you, including its purpose, the situations requiring its use, and best practices for securely managing and storing this sensitive information.
What is form W-9?
The IRS Form W-9, officially called the Request for Taxpayer Identification Number and Certification, is used by businesses to verify the tax information of nonemployee individuals receiving payments. This form collects important details like the taxpayer identification number (TIN), name, and address.
TINs can include a Social Security Number (SSN), Employer Identification Number (EIN), or Individual Taxpayer Identification Number (ITIN). It helps the IRS determine who the taxpayer is.
Form W-9 is not limited to independent contractor payments. Businesses may also request it for other situations, such as:
- Mortgage interest payments
- IRA contributions
- Dividend income
- Real estate transactions
- Proceeds from investment sales
- Cancellation of debt
- Acquisition or abandonment of secured property
- Miscellaneous income
Who has to fill out a W-9?
Here are four common situations where you might need to fill out and send a W-9 form:
- Hiring independent contractors: As a small business owner, ensure you collect a W-9 from any contractors, freelancers, or vendors you pay more than $600 in a year. This helps you accurately report these payments to the IRS.
- Working as a contractor: If you are a contractor, freelancer, or consultant and are paid more than $600 by a single client in a tax year, you’ll need to complete a W-9 so the client can issue a Form 1099-MISC to report your income. However, if there are tax compliance issues, you might be subject to backup withholding.
- Opening a bank account: Both business owners and independent contractors may need to provide a W-9 when opening a new bank account to verify taxpayer information.
- Reporting investment income: Financial institutions might require a W-9 to submit 1099 forms for interest, distributions, and real estate transaction proceeds.
- Debt forgiveness: If a debt is forgiven or canceled, the creditor will need a W-9 to file Form 1099-C with the IRS.
Protecting your information
Whether you are a small business owner or an independent contractor, always be cautious about sharing your W-9 form. Only provide it to trusted clients, banks, or financial institutions to minimize the risk of identity theft.
What is backup withholding?
Backup withholding occurs when the IRS requires businesses to withhold 24% of a contractor’s income due to tax compliance issues. If you, as a contractor, are subject to backup withholding, you must indicate this on your W-9 form. As a business owner, if the IRS informs you that a contractor is subject to backup withholding, you are responsible for withholding and sending this percentage to the IRS.
How to fill out a W-9 Form
The W-9 is a one-page form from the IRS, accompanied by five pages of instructions. The part you need to fill out looks like this:
- Full legal name: Write your full legal name here, just like it appears on your income tax return.
- Business name: If you use a business name or disregarded entity name, write it here.
- Federal tax classification: This section asks how your business files taxes. Check the box that describes your business type. Here are the options:
- Sole proprietor/single-member LLC: If you’re running a business alone and haven’t incorporated, you’re probably a sole proprietor.
- C corporation: If your company has shareholders and a board of directors and pays taxes separately from its owners, it’s likely a C corporation.
- S corporation: If your business is incorporated but you only pay taxes once (unlike a C corp), you’re probably an S corp.
- Partnership: If you share ownership of an unincorporated business with others, you’re a partnership.
- Trust/estate
- Limited liability company (LLC): If you operate like a corporation at the state level but are taxed like a partnership or sole proprietorship federally, you’re likely an LLC. Write C, S, or P in the box to show how you’re taxed.
- Other: This is for international businesses. If you’re unsure about your classification, check the IRS guide for international entities.
- Contact information: Enter your contact details here.
- Account numbers: This is only needed if you need to send account info, like a brokerage account, to the recipient. If unsure, ask the person who requested the W-9.
Understanding the Importance of TIN and Certification
When filling out a W-9 form, it’s crucial to provide accurate information, especially your Taxpayer Identification Number (TIN), and to certify this information correctly. This is not only essential for you as a contractor, freelancer, or business owner but also for the businesses requesting this information from you. Here’s why this is important:
For individuals or entities filling out the W-9, providing the correct TIN ensures that your income is reported accurately to the IRS, helping you avoid potential penalties or issues with your tax filings. For businesses, collecting the correct TIN from vendors and contractors is crucial for filing accurate 1099 forms, which report the payments made to these entities.
Additionally, the certification section of the W-9 form serves as your declaration that the information you provided is correct, that you are not subject to backup withholding (unless specified), and that you are a U.S. person or U.S. resident alien. This certification helps protect both parties by ensuring that the information submitted is truthful and accurate.
Part I: Taxpayer Identification Number (TIN)
When someone requests a W-9, they need your Taxpayer Identification Number (TIN), which is either your Social Security Number (SSN) or Employer Identification Number (EIN).
- SSN: Used for individuals, sole proprietors, and single-member LLCs.
- EIN: Used for businesses with employees, corporations, partnerships, and multi-member LLCs. You can apply for one on the IRS website.
- ITIN: Used for resident aliens who do not have an SSN.
If you don’t have a TIN yet, write “Applied For” in the space provided. This indicates you’re in the process of getting one.
Part II: Certification
Sign and date this section to confirm that all the information you provided is correct. By signing, you certify that:
- The TIN you provided is correct.
- You are not subject to backup withholding (unless otherwise noted).
- You are a U.S. person (including a U.S. resident alien).
- The FATCA code(s) entered on this form (if any) indicating that you are exempt from FATCA reporting is correct.
W-9 form best practices
As a small business owner or an independent contractor/freelancer, ensuring proper tax documentation is crucial. Collecting W-9 forms from your vendors and contractors is an essential step in preparing and filing 1099 forms accurately by January 31 each year. Ensuring the safety of your information is just as important.
Follow these best practices to streamline this process while safeguarding your sensitive data:
- Always request a form W-9: It is a best practice to request a form W-9 from every vendor you work with. This form asks for the vendor’s legal business name, organization type, and tax ID. All of this information is required to complete necessary information returns such as form 1099-MISC.
- Onboard new vendors with a W-9: When your business onboards a new vendor, ensure that the process includes completion and receipt of a W-9 before making any payments. This incentivizes the vendor to complete the form W-9 promptly.
- Collect W-9 forms early: Without a W-9, preparing your 1099 forms becomes difficult. Make a habit of requesting this information at the beginning of your working relationship; doing so will save you a great deal of time at the end of the year.
- Ensure compliance for existing and new vendors: Obtain a completed W-9 form from each applicable 1099 contractor that is already in service and has not yet submitted a W-9 form, as well as from each new vendor. Applicable vendors include any 1099 contractor who provides services for which you expect to pay them at least $600 in a calendar year.
- Exceptions for certain payments: You do not need to obtain a completed W-9 form or send a form 1099 to vendors whom you pay via PayPal or credit card because these amounts will be reported by the merchant services company.
- Be persistent: Do not take “no” for an answer. It is important to make the collection of W-9 forms a priority before engaging services and/or before the first invoice is paid.
- Understand backup withholding: Backup withholding occurs when the IRS requires businesses to withhold 24% of a contractor’s income due to tax compliance issues. If a contractor is subject to backup withholding, they must indicate this on their W-9 form. As a business owner, if informed by the IRS, you are responsible for withholding and sending this percentage to the IRS.
- Safeguard your information: Always store W-9 forms securely, whether digitally or physically, to protect sensitive information like social security numbers and tax IDs. Use encrypted storage solutions and limit access to only those who need to handle these documents.
- Avoid costly penalties: Form 1099 must be completed for any 1099 contractor or vendor that provides services for which they expect to be compensated. No matter the size of your company, failure to file correct information returns by their due date can result in costly financial penalties. The penalty for willful failure to prepare timely returns can be as high as $5,500 per information return.
- Detailed compliance for businesses: If your contractor wants their check made out to a business name and writes this name on line 2 of the form, then an EIN number in Part I is required. Remember: Businesses have EINs; individuals have SSNs.
- Collect W-9 forms from all vendors: Even if you do not expect to pay a vendor more than $600 in a year, it’s a best practice to collect a W-9 form. This ensures you are prepared if payments exceed the threshold.
By following these best practices, you can ensure smooth tax preparation and compliance, saving time and avoiding penalties while keeping your sensitive information secure.
Special considerations for self-employed business owners
If you are a self-employed business owner, such as an independent contractor or freelancer, you need to be aware of specific responsibilities regarding W-9 forms:
- Providing W-9 forms: When a client hires you and pays you $600 or more in a tax year, they will request you to complete a W-9 form. Ensure you provide accurate information, including your legal business name, organization type, and taxpayer identification number (TIN).
- Receiving 1099 forms: At the end of the tax year, you will receive a 1099 form from your clients reporting the income they paid you. This form is essential for your tax filings, as it reports your earnings to the IRS.
- Tracking your payments: Keep detailed records of all payments received and the corresponding W-9 forms provided. This will help you ensure that all income is accurately reported and that you are in compliance with IRS regulations.
- Understanding backup withholding: If you are informed by the IRS that you are subject to backup withholding, you must indicate this on your W-9 form. Your clients will then withhold 24% of your payments and send it to the IRS.
- Protecting your information: Just like business owners, you should safeguard your W-9 forms and related documents. Use secure storage solutions and share your W-9 form only with trusted clients to minimize the risk of identity theft.
- Detailed compliance for individuals: If the person being paid is an individual (no company name on line 2), they should provide their SSN in Part I. If only line 1 is filled out, an SSN is required, and the checks you write should be made out to that person. Individuals checking the “Individual/sole proprietor or single-member LLC” box on line 3 should expect to receive a 1099-MISC if they meet the $600 threshold.
Is a W-9 used for self-employed individuals?
Yes, a W-9 can be used for individuals who are self-employed. If you’re an independent contractor, freelancer, or self-employed, you must provide Form W-9 to anyone who pays you over $600 in a year without hiring you as an official employee.
What happens if I do not provide a W-9 form?
If you don’t provide a Form W-9 or if the information is incorrect, 24% of your future payments from your client will be withheld as tax. Additionally, you could face penalties and fees for intentionally not providing accurate information or for misusing TINs.
The bottom line
Properly handling W-9 forms is essential for both small business owners and independent contractors. Ensuring accurate tax documentation and compliance with IRS regulations is vital to avoid costly penalties and streamline your year-end reporting process. But managing W-9 forms effectively isn’t just about filling out paperwork—it’s also about maintaining precise and consistent bookkeeping.
Accurate bookkeeping is critical here because it ensures that every financial transaction, including payments to independent contractors, is properly recorded. This careful documentation supports accurate tax reporting and helps ensure that forms like the W-9 are correctly managed and stored. At CoCountant, we provide comprehensive bookkeeping services and tax advisory and filing services designed to keep your financial records in perfect order while simplifying the tax filing process and ensuring compliance with all IRS requirements.
With CoCountant, you can trust that both your bookkeeping and tax documentation needs are fully covered.