W-9: What is it used for?

Both contractors and companies are required to report taxes appropriately. Failing to report or incorrect reporting or record falsification will result in compliance problems, tax audit, and penalty. One of the necessary documents used in this process is the W-9. More formally known as a “Request for Taxpayer Identification Number and Certification,” this is what business owners use to collect information on independent contractors, non-employee providers who are not employees, and freelance employees. Ensure that at all times you are aware of purpose, process, and intention of the W-9 so that you can administer tax compliance and withholdings in a timely and effective manner.

What is a W-9?

W-9 is an IRS form by which a business is able to obtain an independent contractor’s Taxpayer Identification Number (TIN). A W-9 is compulsory if a business pays an independent contractor more than $600 in a tax year.

The main facts about the W-9

The W-9 form provides a business with a contractor’s name, physical location, and Taxpayer Identification Number (TIN), to utilize when reporting taxes. It is never employed to report pay earned by a contractor. Unlike form 1099-NEC reporting contractor pay earned, W-9 is a supporting role to report on. The IRS utilizes W-9s to trace and cross-reference information to maintain accurate reporting of taxes to prevent fraud. Despite limited format changes on W-9 throughout history, tax reporting requirements and withholding have changed in conjunction with its use.

What is a W-9 form used for?

The W-9 form is important when it comes to taxation. The main purposes and why it is important to contractors and employers are discussed below:

• Collection of Taxpayer Identifying Information: The W-9 is utilized by employers to obtain a valid Taxpayer Identification Number (TIN) from independent contractors.
• Social Security Numbers (SSNs) and Employer Identification Numbers (EINs).
  Payment Reporting to the IRS: The information collected on the W-9 is used to fill out a 1099-NEC.
• 1099-NEC is utilized to report payment an organization pays to a contractor in a calendar year.
• Backup Withholding Prevention: The law requires the companies to withhold a payment of 24% in case the contractor does not supply a valid TIN.
• Completing form avoids unnecessary withholding.
• Increasing taxpayer compliance: The W-9 assists employers and contractors with meeting state and federal tax laws.
• Verify Payee Information: W-9 is used by companies so they can check if the contractor’s name and TIN are correct against IRS records.

Only certain individuals receive a W-9.

Form W-9 is normally given to service providers who are not employees. The following are the kinds of professionals that usually receive one:

• Independent contractors: A W-9 is used for non-employee service providers and not employees. They are contractors on a project and are exempted from payroll taxes.
• Freelancers: Freelancers provide their services to businesses without accepting a long-term employment commitment.
• Consultants: Consultants who offer advisory or consultative services to companies.
• Sole proprietors: Merchants who have a business but are not a corporation or an LLC.
• Limited Liability Companies (LLCs): Single-member LLCs generally use their owners’ SSN to report business revenue. Multi-member Limited Liability Companies can use an EIN instead.
• Other business firms: Any organization other than a corporation that a business sends money to can be requested to supply a W-9.

Step-by-Step Instructions: How to fill out a W-9 form

To complete the form properly, go through each of the steps below in sequence. Below are the main fields you will have to fill in on the form.

• Headline: Simply enter that registered business or legal name in returns for taxes.
• Business Name/Rejected Entity Name: If you have a DBA (Doing Business As), please give us your business name.
• The five main types of taxes are: individual, C corporation, S corporation, partnership, and LLC.
• Taxpayer Identification Number (TIN): Your SSN (individual), or EIN (business). If an EIN is necessary for you, apply on IRS.gov.
• Address: Provide your current mailing address for tax purposes.
• The account numbers constitute a voluntary component of a payment but are not obligatory.
• Certification: Ensure your TIN is accurate and certify that you are not subject to backup withholding.
• Signature: Put a personal mark on a document to authenticate information with ease.

It is used for a contractor.

To know what W-9 is for is essentially to know who is to complete it. The form is generally meant for individuals who are classified as non-employee.

• Workers: Independent contractors must complete a W-9 when they are providing services to an organization.
• Not a representative: The workers receive a W-4 on which they will calculate the withholding of taxes.

Differentiating between an employee and a contractor

People who complete a W-4 have their taxes and their payroll taxes taken out of their check and have their health insurance and pension contributions taken out by their employer. They even have their work assignment and work hours determined by their employer. People who complete a W-9 are independent contractors and are responsible for their own taxes, including their own self-employment tax. They are of no value to their employers but have freer schedules and terms of employment. Misclassifying an employee as an independent contractor has a potential penalty with the IRS.

Is it considered an income?

No, a W-9 is never considered to be income. It is an IRS form received only to get information regarding an independent contractor or freelancer, such as name and address and Taxpayer Identification Number (TIN). It is never used to record earnings or payment. Income is officially reported on the 1099-NEC form instead to note what was paid to a contractor in a tax year. Contractors will utilize information on the 1099-NEC—and not on the W-9—when reporting a tax return.

How human resources utilizes the W-9

The W-9 is a critical part of human resources management because it assists departments in tracking vendors, making payments, and staying in compliance with IRS regulations.

• Vendor management: The human resources department obtains W-9s for independent contractors/vendors.
• Accounts payable & payroll: Used for payment processing and to generate form 1099-NEC.
• Compliant with: Helps with compliance with IRS taxation.
• Record keeping: W-9s are retained for purposes of taxation reporting, and also for audit.

In order to properly report taxes and be in compliance with the IRS, companies must collect W-9 forms from contractors before issuing 1099s. We must remember a W-9 is also not a record of earnings but a request form to collect only tax information. Contractors must keep accurate information to prevent potential problems such as backup withholding. Understanding how to use it and why it is used will keep company and contractor in compliance with the IRS and sidestep any chance of penalty.