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Hiring a contractor or adding a new vendor creates more than an accounts payable record. If the vendor subsequently receives a reportable payment, your business will need to know the vendor’s correct legal name, Taxpayer Identification Number and federal tax classification to prepare an information return.
That’s why companies routinely request a W-9 from vendors when they join a company instead of waiting until January. Form W-9 helps provide information about the payee, the federal tax classification of the payee, and which TIN should be used for reporting. It also helps in making backup withholding decisions when necessary.
The main purpose of a W-9 for vendors is to give the payer reliable tax information before a reporting obligation arises.
A Form W-9 includes the taxpayer’s name and TIN that might be used on a Form 1099 or other information return.
The wrong name/TIN combination can result in IRS mismatch notices and further vendor follow-up. The advantage of collecting the information directly from a signed W-9 is that a business will have a documented source from which to obtain the information to use in their vendor records.
A completed W-9 can identify the payee as an individual or sole proprietor, C corporation, S corporation, partnership, trust or estate, or an LLC with the appropriate federal classification.
This is important because it can determine whether a payment is reportable or not, based on federal tax classification. For example, an LLC label alone does not indicate to the payer if the entity is taxed as a corporation, partnership or disregarded entity.
Some payments, including certain legal and medical payments, may still need to be reported. However, many other payments to corporations are generally exempt from Form 1099-NEC and Form 1099-MISC reporting.
The W-9 provides tax classification, exemption code, and TIN information that should be used to help determine whether or not the payee is exempt.
The vendor’s TIN and certifications also help determine whether W-9 backup withholding rules apply.
Qualifying reportable payments may be subject to the 24% federal backup withholding rate if a payee fails to furnish a TIN or an IRS notice requires backup withholding due to a TIN issue.
Knowing when to request a W-9 can help avoid year-end filing delays.
As a general rule, businesses should seek tax information prior to making potentially reportable payments.
For example, you hire an independent consultant in February, but only request a W-9 in January next year. When this happens, a consultant might be hard to find by the time you need to fill out a 1099.
It is collected at onboarding, which allows the accounts payable and tax teams time to validate the information.
A new W-9 may be appropriate when the vendor reports a change involving its:
If the information in the W-9 is the same for a business, they do not need a new W-9 every calendar year.
Form W-9 is generally used to obtain a TIN and certifications from a U.S. person, including a U.S. resident alien.
Instead, a foreign vendor generally supplies the appropriate Form W-8.
Review the entries while the vendor is still available to correct mistakes.
For a disregarded entity, the name and TIN rules require the tax owner’s information instead of just the operating LLC name. Checking the form will ensure that the payer doesn’t transfer incorrect entity information to a Form 1099.
The vendor gives Form W-9 to the requesting business. Typically, the payer retains the form and does not submit the W-9 to the IRS.
While W-9 and 1099 reporting are connected, a W-9 does not necessarily mean that the vendor will receive a Form 1099.
The business still needs to determine:
After answering those questions, the W-9 includes information the payer should use to prepare an appropriate Form 1099-NEC, Form 1099-MISC, or other information return.
This is another reason why it may be advantageous to collect a W-9 from a corporation even if many of the payments were not reportable. The form includes the payee’s federal tax classification, which helps support the reporting decision.
Do not wait until filing season just to resolve missing information.
If the vendor fails to include a necessary TIN, or leaves out any information or offers information that seems inconsistent, contact the vendor and ask for a corrected form.
When the rules apply, backup withholding is typically 24%. Situations include when the payee has not provided the required TIN or the IRS informs the payer of a name/TIN issue and requires the payer to take action.
A business should follow the applicable IRS backup-withholding and B-notice procedures rather than inserting a guessed TIN just to complete a Form 1099.
Tax1099 can move vendor W-9 requirements into the onboarding and filing workflow rather than leaving them as a year-end task.
Tax1099 allows businesses to electronically request vendor W-9 and W-8 information, to manage recipient information, and perform real-time or bulk vendor TIN verification. The TIN matching feature can validate many name/TIN records and flag records requiring follow-up with the vendor.
With vendor information in place, the same process can be used to prepare and e-file appropriate Forms 1099.
Yes, it could be collected at onboarding to get the contractor’s TIN and tax classification before reporting or backup withholding issues occur.
A business can request a W-9 from a corporation to document its TIN and federal tax classification and determine whether a reporting exemption applies.
No. The vendor provides it to the requester, which generally keeps it in its business records.
No. But if there are changes in the information, such as the vendor’s name, TIN, tax classification, or exemption status, request updated information.
Generally, no. A foreign vendor usually provides the appropriate Form W-8 instead.
Start Filing Season With Vendor Records Already in Order. Collect W-9s, check name/TIN details, and keep vendor information ready for 1099 filing with Tax1099. Get Vendor Records Ready with Tax1099
Collect W-9s, check name/TIN details, and keep vendor information ready for 1099 filing with Tax1099.