Getting a W-9 form before you make the first payment to a new vendor or independent contractor is critical and will save tremendous time at year-end and reduce potential IRS penalties. A W-9 form provides you with the vendor’s legal name, TIN number, tax classification, address, and exemption/FATCA status. This information is then used to process a 1099 form at year-end if required. Getting W-9s upfront will help you avoid many headaches and streamline your year-end W-9/1099 process.
Avoid backup withholding – You can avoid the requirements for backup withholding. Backup withholding can be very onerous and time-consuming. The IRS requires companies to withhold 24% of all reportable amounts paid to the vendor and remit the funds collected to them. You then have to follow a very specific deposit schedule outlined by the IRS with potential penalties for missing payment deadlines. See the deposit schedule example at the end of this article. You then have to make sure to file Form 945 timely at year-end. And getting a W-9 upfront eliminates the requirement to backup withhold anything in most cases. To learn more about backup withholding click here.
No annual solicitation requirement – You can avoid having to set up a process for annual solicitation of the vendor’s W-9 form. Part of the backup withholding process requires the company to show they initially requested the W-9 form upon the first transaction and then at each of the following two calendar year-ends. If the company cannot show that they followed the annual solicitation requirements they may be subject to additional IRS penalties. Again, getting a W-9 upfront will eliminate this requirement. For more information see our article, Beware of annual solicitation requirements.
Less 1099 forms to file – When you deduct money from a vendor or independent contractor due to backup withholding requirement you will always be required to issue a 1099 form. In many cases, the initial payments made to the vendor or independent contractor are not reportable. And the only reason you now have to issue a 1099 form is to report the backup withholding. In addition to the extra work, this also exposes you to the risk of additional penalties and interest due to the increased number of 1099s issued if not done right.
Less “B” notices to work – As you the increase the number of 1099s that are issued, you will also increase the likelihood of receiving “B” notices from the IRS. When submitting a 1099 form to the IRS without a TIN number or with a TIN that doesn’t match the legal name on the W-9, you will likely receive a CP2100 or CP2100A notice. This is an error notice from the IRS saying the 1099 form you submitted was not correct. This notice will have specific requirements that you will have to follow which likely includes sending out “B” notices to your vendor. This also exposes you to the risk of additional penalties and interest if you don’t get the “B” notice process done right.
Easier to get W-9 upfront – It is much easier and more efficient to get a W-9 form from a vendor when they are eager to get paid then at a later point in the year when they have already been paid. Companies that manage this process well require vendors to submit a W-9 form prior to purchasing any goods or authorizing any services. Or they require the vendor to submit a W-9 form to them before payment is made. If you wait until year-end you may not be able to find the vendor or they may be reluctant to provide a W-9 form since they have already been paid.
Reduced risk of penalties – If you wait until the end of the year to get all your W-9s from your vendors you run the risk that you can’t get the W-9 from the vendor at all. The vendor or independent contractor may be out-of-business. Or they may just not respond knowing you can’t report the payments to the IRS without their legal name and TIN number. At this point, you can no longer go back and withhold 24% of all payments to the vendor and follow annual solicitation requirements. Your company now runs the risk of owing the entire 24% that was not backup withheld as well as significant IRS penalties. For context that would be a $2.4 million dollar penalty on $10 million dollars paid to a vendor. The risk here is massive and really not understood by many companies. For more information on potential IRS penalties click here.
Don’t issue purchase orders or authorize work until a W-9 form is received. And if you end up receiving a bill from a vendor, don’t make any payments to the vendor until a W-9 is received! If they are unable or unwilling to provide a W-9, make sure you comply with backup withholding requirements starting with the first payment.
Also, consider the benefits of using W9manager to automate your entire W-9/1099 process from W-9 collection through 1099 filing. Don’t spend any more of your valuable time on this process and help ensure IRS compliance. Plans start as low as $29/year and you can try it free for 14 days with no credit card.
Example deposit schedule for backup withholding
Here is an example of the IRS regulations you can avoid by just getting a W-9 timely.
There are two deposit schedules—monthly or semiweekly—for determining when you must deposit withheld federal income tax. These schedules tell you when a deposit is due after a tax liability arises (that is, you make a payment subject to federal income tax withholding, including backup withholding). Before the beginning of each calendar year, you must determine which of the two deposit schedules you must use.
For 2020, you’re a monthly schedule depositor for Form 945 if the total tax reported on your 2018 Form 945 (line 3) was $50,000 or less. If the total tax reported for 2018 was more than $50,000, you’re a semiweekly schedule depositor.
If you’re a monthly schedule depositor and accumulate a $100,000 liability or more on any day during a calendar month, your deposit schedule changes on the next day to semiweekly for the remainder of the year and for the following year. For more information, see the $100,000 Next-Day Deposit Rule in section 11 of Pub. 15.
Disclaimer – Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.