What is the Purpose of the W-9?
Business owners are required by the IRS to report amounts over $600 paid annually to certain individuals and business entities on Form 1099. The most common use of the Form W-9 is to gather the necessary information from these individuals/entities to process the required annual Forms 1099 – more specifically the complete legal name, address, taxpayer identification number, the federal classification of the payee and certification that the payee is exempt from backup withholding.
Why should you care about the W-9?
As a business owner there are two primary incidents where a completed Form W-9 is important to you.
- Filing the required 1099s at the end of each year.
At the end of each year you are required to file a 1099 to report payments of at least $600 (in total) to persons (and some businesses) who are not your employees. Among other categories you must report payments for services performed, payments to attorneys and payments for rent. The Forms 1099 are due by January 31st each year. Having a completed Form W-9 already on file makes this process much smoother and helps you to avoid any penalties for late filing.
- IRS notice of backup withholding
Most payees will be exempt from backup withholding. But if you hire an independent contractor who is not exempt then the IRS requires that you withhold income tax from the contractor’s payments and submit it to the IRS.
Implementing a best practice:
As a best practice consider implementing a routine of requesting new vendors to provide a completed Form W-9 before you process the first payment for services. The Form W-9 can be downloaded from the IRS website at https://www.irs.gov/pub/irs-pdf/fw9.pdf?portlet=103 or ask your accountant to help. Be sure to provide a copy of the completed W-9 to your tax preparer and keep the original in your files.
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